Dear reader

More on the question of value

In this newsletter, we continue our discussion on the issue of costing for the value of a service. Pension funds are normally managed by sponsor appointed trustees. These trustees are usually not experts in this field and therefore have to be able to rely on their service providers to protect them, their fund and other stakeholders, at all costs, sometimes even against ill-considered demands of the employer or its staff. Being able to rely on a service provider requires the service provider to be an expert and to be firm when faced with such ill-considered demands. How do you value this ‘peace of mind’?

Related to the question of value is the question of whether servicer provider rotation improves the governance of your fund?

In this newsletter we provide our opinion on these two topics, we inform of a change of guard at Retirement Fund Solutions and the Benchmark Retirement Fund; Kai Friedrich and Thomas Kaber share their new experiences in our industry and we report on some ‘leaked information’ on the National Pension Fund.

We also provide links to articles that appeared in the media. These are usually selected because they either cover topical developments or address pension fund issues that trustees and retirees are regularly faced with and should thus be of value and provide guidance to trustees, and to fund members approaching retirement.

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 05.2013

In May the average prudential balanced portfolio returned 6.25% (April minus 0.59%). Top performer is Namibia Asset Management (8.33%), Investment Solutions (4.56%) takes bottom spot.

We have been concerned about the exaggerated growth of local equity markets as the result of fiscal and monetary intervention by governments and reserve banks across the globe for some time. This intervention has resulted in large flows of capital into emerging markets such as South Africa, in search for higher yields outside the low interest rate environments of the developed world.

For us in Namibia, equity and equity investors benefited from a strong Rand and borrowers from low interest rates. Those that invested offshore or in fixed interest instruments suffered.

It becomes ever more evident that the tide is busy turning. Interest rates  will increase further over time and the trend of the Rand will remain negative.

For further analyses and our views download Benchtest 2013-05, here...

What is a service worth to you? (Part 2)

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?

Should you rotate your service providers on a regular basis?

Pension funds typically employ a whole array of different services from 3rd party providers. Certain service providers offer composite services while others are focusing on a limited range of closely related services.

Good corporate governance requires the regular review of service providers, does it not? In essence good corporate governance aims to manage risks and compliance. Rotating service providers for the sake of rotation certainly cannot be at the core of good corporate governance.

Assuming one is satisfied with the services provided by a service provider one would have to determine whether rotation reduces risk and/or strengthens compliance management, before this question can be answered conclusively.

What are the typical risks a fund faces vis-à-vis its service providers? Here are some that spring to mind immediately:

• The service provider overcharges, i.e. its costs are excessive relative to the value of the service provided. Costs can be benchmarked to the market, but to value the service provided is typically left to judgement.
• The service provider does not meet required standards of diligence such as inferior controls that lead to errors and omissions, loss or corruption of data and compliance failures; unqualified or inexperienced staff; high staff turnover and loss of corporate memory; insufficient indemnity and fidelity cover; inadequate succession planning; late, poor or defective reporting and potential of business failure due to defective or unsustainable business philosophy and policies.
• The service provider is not adequately supervised by another independent expert, particularly relevant to composite service providers.

Considering these key risks a service provider presents to a fund, it is quite evident that the risks referred to will not be addressed through rotation of service providers.

There are industries and situations where the rotation of service providers makes sense as it mitigates important risks. Rotation is typically employed in the security and asset protection industry or where highest standards of independence between client and service provider are required, such as in the audit profession.

In other industries rotation could in fact present additional risks. Personal services dependent on an acquired knowledge of the client or administration services relying on historic data going back over many years, such as typically relevant to the pensions industry are a points in case where rotation may present bigger risks than it might mitigate.

A ‘change of guard’ at RFS and Benchmark

There will be a change of guard at Retirement Fund Solutions and the Benchmark Retirement Fund, as noted previously. This change is taking effect in the following manner.

Founder member, Mark Gustafsson, and Sigi Gustafsson, left RFS at the end of June. Mark will venture into private practice as financial planner and adviser under the name of Finmark and will be supported by Sigi. We are sorry to see Mark and Sigi leaving but at the same time are grateful for their years of support and contributing positively in trust and confidence towards the success of the company and the well-being of our team!

We wish Mark and Sigi success in realising their dreams and aspirations!

As from 1 July Kai Friedrich will take up directorship of our company. Kai will assume responsibility for all fund accounting functions in the company and is designated to assume responsibility of Principal Officer of the Benchmark Retirement Fund. We wish Kai well in his new role and with his new responsibilities and trust that his newly acquired expertise will further strengthen the capabilities of our team for the benefit of our clients!

Günter Pfeifer, Principal Officer of the Benchmark Retirement Fund, will assume the position of trustee on the board of the fund and will pass on his responsibilities of Principal Officer to Kai. Günter retains the management responsibility for the Fund though, and will support Kai until he has established himself fully as Principal Officer of the Fund. In this new constitution, the Fund will be assured of continuity while the board of trustees will avail itself of up-to-date expertise based on the latest industry laws and practices in SA.

A donation to the Red Cross

RFS recently donated N$ 5,000 worth of blankets to a project undertaken by Namibia Red Cross Society.


Stefanus Morris, Benchmark Client Manager at RFS, hands over the first blanket.


Stefanus Morris explains the company's reason for the donation.

Did you know?


Kai Friedrich (left) and Thomas Kaber (right) recently joined the pensions industry, Kai from the audit profession, and Thomas from the private equity asset management industry. Kai is currently also studying for the Advanced Post Graduate Diploma in Financial Planning. Kai and Thomas get new insights on a daily basis and cover a lot of new ground in their studies and their work exposure. Join them on this journey into their new world of pension funds.

Death benefits by Kai Friedrich

• A nominated beneficiary must survive the member of the fund to qualify for the benefit payable upon the death of the member. This means that the estate of the nominated beneficiary cannot benefit anymore.
• A nominated beneficiary does not acquire any right to a benefit of a member during the lifetime of a member.  It is only upon the member’s death that the nominated beneficiary is entitled to accept the benefit and the fund is obliged to consider the beneficiary in the distribution of a benefit. Until the death of the member, the nominee only has an expectation of claiming the benefit, but has no vested right to the benefit.
• A nominated beneficiary is only entitled to that portion of the benefit allocated by a deceased fund member to him or her, if there is no dependant and no shortfall in the estate of the deceased member.
• A beneficiary of a benefit upon death of a fund member must be a natural person. A member of a fund cannot nominate his/her estate as a beneficiary (subject to a narrowly defined exception). The same applies to nominations of Companies and CC’s as beneficiaries. The benefits payable by a fund upon the death of a member shall not form part of the estate of such a member, as per section 37C(1) of the Pension Fund Act. Thus a nomination of a member’s estate as his/her beneficiary does not carry any weight at all in the trustee’s considerations. Benefits are only payable to the estate if the deceased fund member has not nominated any beneficiary and leaves no dependant.
• If a fund member nominated a beneficiary found to not qualify as a nominee, such as having predeceased the fund member, the remaining nominees would not be entitled to receive the non-qualifying nominee’s share. The board of trustees is only allowed to pay such a portion of the benefit as is specified by the member. This portion would then have to be paid to the estate of the deceased.

The National Pension Fund

There have been some further developments on this ‘front’ recently. A summary of a report by consultants to the Social Security Commission on the Namibian National Pension Fund Project of September 2012 was received from an unknown source.

In recognition of concerns previously raised on earlier proposals, the NPF as currently proposed, aims to realise the general objective of minimising potential negative economic implications and maximising the potential economic benefits and recommends the following actions specifically vis-à-vis existing private funds for consideration:

• Minimise impact on existing pension funds.
• Efforts should be made not to undermine these schemes and their achievements.
• The criteria for accrediting these schemes should be realistic and achievable.
• The primary focus of the NPF should be on employees who are not currently members of private pension funds.
• Minimise the disruption of existing pension funds and the fund management industry.
• Reduce the scope for disagreement between employees, trade unions and employers.
• Minimise the likelihood of significant increases in labour costs due to multiple pension contributions.

The report recommended the following final design for the NPF after a workshop that was held in September 2012 with the participation of Social Security, labour and employers:

• A social protection element to which every worker in the formal sector belongs who earns more than N$ 1,222 per month and to which he/she shall contribute at 2.5% of salary. The social protection element will provide members with a minimum pension which will be at least as high as the old age grant, together with a basic death - and disability benefit, and will meet the administration costs of the NPF.
• A retirement account which every worker in the formal sector must have unless that worker belongs to an accredited occupational or individual retirement fund. For such accreditation, a total contribution of at least 10.82% by member and employer, after costs, will be mandatory. The retirement account will be operated as a cash balance plan with guaranteed (by Government) conversion terms. The guaranteed interest rate will be the change in the consumer price index plus 4.5%. The retirement account is converted to pension on retirement at guaranteed conversion terms, or may be drawn down in the form of an income on loss of employment.
•  A saving account which workers (whether in the formal or informal sectors) may choose to have. Irregular contributions are made by the workers. The workers can draw on their saving account at any time. The team recommends a slightly lower guaranteed rate of interest at, say, the change in the consumer price index plus 3%, in order to meet the extra costs of such a savings account.

The social protection element is envisaged to look as follows:

Word has it that after all the time and effort invested in, and despite the consensus that was attained, senior government officials have now vetoed these proposals.

The Namibia Employers’ Federation has invited interested parties to a breakfast seminar on the NPF at Hotel Thüringer Hof on 4 July. Bookings are essential and we are calling on all funds, service providers, employers and other interested parties to attend this seminar.

Interesting media snippets

Your replacement ratio can be a pension pitfall

“I know of one company in particular which offers the choices of pensionable salaries of 25%, 50%, 75% or 100% of full salary. This is to increase employees’ take-home pay.”

But a person’s pensionable salary does not include bonuses and allowances and, usually, also excludes performance incentives.

“This has significant effects on the employee’s benefits that are not well explained.”

Read the article, by Brendan Peacock, in Business Times of 18 May 2013, here…

Defencex – another major scam hits the headlines in SA media

A total amount of R816m flowed into Net Income Solution’s bank account. This was one of the discoveries made by inspectors Louis Strydom and Malcolm Campbell of PWC appointed to investigate the affairs of Net Income Solutions, which is more commonly known as Defencex.  It is now possible to estimate the scheme’s shortfall: If R816m was deposited, and only R320m remains, that leaves a deficit of R496m. It is not hard to figure out what happened to this R496m. Defencex was paying its members returns of 2% a day. This money had to come from somewhere. The obvious answer is that it came from the members themselves. In other words, most of the R496m that is “missing” was probably used to pay Defencex members their income. That is how a classic Ponzi scheme works.

Read the article here…

Common investment myths debunked

Linda Eedes, analyst at RE:CM comments on the following 3 ‘investment myths’ in Sanlam’s Funds on Friday:

• Positive economic growth equals positive investment returns;
• Uncertainty should be avoided at all costs;
• A good company is always a good investment.

Download the article here…

The basics of financial wellness

An article published in MoneyMarketing newsletter of 27 June asks, what does it mean to be financially well? Spending less than we are earning? Not being dependent for basic necessities? Being able to afford some luxuries? Having a growing pot of wealth? Being happy with what our current income can buy? Making sure our future financial income is secure? Financial wellness is many things – but to many of us it is making sure we are comfortable today and tomorrow, and that we can provide for what we need to provide for and a few of the ‘want’ items. In our journey to financial wellness it pays to keep a few basics in mind.

Read the article here…

The six habits of successful companies

What makes private companies great? In an unscientific analysis six habits found at the biggest private firms as well at some smaller, successful ones have been extrapolated. The writer hopes you can apply one or more of these lessons to your business, no matter what size. Here is the list:

• They have a mission
• They keep employees happy
• They react quickly and adapt
• They work the long-term
• They have a family plan
• There are no islands

Read the full article,  published in Forbes, here…

And finally...

"When I was a boy I was told that anybody could become President; I'm
beginning to believe it.”
~ Quoted in 'Clarence Darrow for the Defense' by Irving Stone.

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.