Dear reader

Will the pension fund industry survive this onslaught?

In this newsletter we dwell on the dilemma of trustees applying ambiguous law or taking a decision based on a calculated risk, in this instance specifically regarding the disposition of unclaimed benefits. We comment on the risk of measuring fund performance only by reference to internal benchmarks and report back on the position of Namibian funds vis-a-vis the insolvency of SA based First Strut which lost investors close to R 1 bn as also reported in local financial media.

Of serious concern however is the conclusion we make having carried out a study of the requirements of future quarterly reporting to Namfisa, a wake-up call to the pensions industry and to Namfisa!

For those that take an interest in the pensions industry we also provide links to a few interesting articles.

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 07.2013

In July the average prudential balanced portfolio returned 2.70% (June: -3.42%). Top performer is Namibia Asset Managers (3.54%), Allan Gray (1.69%) takes bottom spot.

Since the steep fall in global financial markets in June, in consequence of a comment by Fed Chairman Bernanke of a tapering of the Fed’s large scale asset purchase (LASP) programme, nervousness in markets has subsided. However, traders and investors have taken a cue and are a lot more cautious. This manifests more prominently in the fixed interest markets where interest rates have moved off their lows already. US benchmark 10 year notes are currently hovering around 2.4%, off a low of 1.65%. This may not seem much in absolute terms, however for the investor this represents a capital loss of 32%! Equity markets are currently wavering between fear and the hope that the Fed’s LASP programme will continue.

The question in the investor’s mind will be when the Fed will start tapering its LSAP programme. Until such time as this becomes clearer, equity markets are likely to remain volatile, fertile ground for the speculator but a time where a long-term investor needs to sit tight and ‘turn a blind eye’ to any downturn in the markets. At this stage, the Fed is unlikely to change direction until a new board of governors under a new chairperson has taken the reigns and has settled in. This will possibly only be early next year, while chairman Bernanke is likely to be replaced in the next 2 months or so.

Local indicators also evidence the expectation of a tapering of the LSAP programme. Interest rates have started to tick up in the face of declining foreign flows into local bonds. Foreign investment flows into local equities have virtually dried up with an inflow in July of a mere N$ 463 million. These developments have no doubt also contributed to the weakening of the Rand.

Are we now moving into the ‘muddle through’ phase of global economies? Despite some positive economic indicators coming out of the US and Europe, it is unlikely that we will see a dramatic improvement of global economies. There will likely be a slow shift of investment flows from equity markets to bond markets as investors see value in higher interest levels and try to capitalise on mispricing of assets that is likely to occur. A concerted global recovery will most likely only happen in a year or two and is likely to be slow.

The general expectation of commentators is that deleveraging of bloated balance sheets will happen through inflation, i.e. asset values blown up through excessive money supply will depreciate in real terms, through inflation. The article ‘The pressing need to deleverage raises spectre for deflation’ in this link, hints towards another scenario for deleveraging. The last time this happened was long before most of us were born and we would therefore find it difficult to relate to such a scenario. Deflation would imply negative inflation coupled with very low interest rates, rather than high inflation coupled with high interest rates, i.e. the value of assets and incomes would decline, the end result being the same though. Psychologically, deflation is likely to be perceived much more negatively than inflation and the impact on consumption and the economy is likely to be much worse than in an inflationary environment.

To find out how these and other developments impact on our investment views, download Benchtest 2013-07, here...

Unclaimed benefits – a dilemma for trustees

How trustees should deal with unclaimed benefits is a question for which the industry has not established a common position. We also doubt that there is any Namibian legal precedent upon which trustees can rely in this regard. This of course does not make it any easier for trustees. How should trustees deal with this dilemma?

In the first instance, the fund should comply with its rules. Some fund rules state that a benefit remaining unclaimed for a specified period reverts to the fund. Others direct that such benefits are to be paid into the Guardians Fund at the Master of the High Court after expiry of a specified period while yet other rules are silent.

The Pension Funds Act is very specific on how a death benefit is to be disposed of while it is silent about any other benefits. In the case of death benefits funds must follow the prescriptions of section 37C. The Pension Funds Act therefor does not prohibit payment of unclaimed benefits, other than death benefits, to the Master.

The Administration of Estates Act (abbreviated in this discussion as ‘AE Act’) in section 93 makes reference to benefits that remained unclaimed for a period of 5 years or more and prescribes a lengthy process that needs to be followed whereupon such unclaimed benefits are to be paid into the Guardians Fund at the Master of the High Court.

Namfisa has not taken an official position with regard to the disposition of unclaimed benefits. However, Namfisa cannot of course make the law, at best it can give its opinion on how the law is to be interpreted, but at the end of the day only a court of law can bring clarity on any ambiguity contained in any law.

Pension fund rules of course may not contravene any other law. If a fund acts in accordance with its rules and these rules do contravene another law, it might invoke a penalty provision of that other law. The AE Act makes provision for a penalty of N$ 4,000 or 12 months imprisonment for contravening section 93.

In practice, those funds whose rules provide for payment of unclaimed benefits to the Master, usually require payment sooner than the 5 years provided for in section 93 of the AE Act and our experience throughout has been that the Master has accepted such payments. Would such payment be a contravention of said section 93 and pose the risk of the penalty being invoked?

In as much as trustees no doubt would prefer to act strictly within the confines of prevailing law, trustees, as any other law abiding citizen will at times have to take a ‘business decision’ rather than a decision based on clear facts and the disposition of unclaimed benefits appears to present such a scenario. In such cases, one needs to consider the risks the ‘business decision’ may present.

In assessing the risk of disposing of unclaimed benefits through payment to the Master before expiry of the 5 year period, the question is who would institute a legal challenge and why would a person institute a legal challenge? One would expect the body vested with the enforcement of the provisions of the AE Act (the Master of the High Court) to enforce the penalty provided for. One could also expect the beneficiary to institute a legal challenge.

Approaching this matter pragmatically, we suggest that if the rules provide that an unclaimed benefit is paid to the Master earlier than the 5 years referred to in the AE Act, the Master has no argument for imposing a penalty, as the end result is exactly what the AE Act intends to achieve. It may in any event in our opinion be argued that the 5 year period referred to is the ‘outer limit’ and we would not read this provision as prohibiting earlier payment to the Master.

Considering the matter from a beneficiary’s point of view, he may argue that he should still have been able to receive payment from the fund rather than from the Master. The beneficiary’s argument of payment from the Master rather than the fund could be based on the frustrations he had to endure, the time delays and possible loss of interest and a remote argument of additional costs incurred. In our opinion, the risk a fund might face on the basis of such arguments is small and the probability remote as there are likely to be pro’s and con’s for either alternative from the beneficiary’s perspective.

If a fund is concerned that its rules may be illegal to the extent of not correctly prescribing the procedures for disposing of unclaimed benefits the trustees can either take a legal stance or a business stance. Taking the legal stance it can obtain greater comfort by way of a legal opinion that ideally would rely on a relevant precedent but remains an opinion that can still be shown by a court to have been wrong. Alternatively, taking a business stance, the trustees need to assess the risk of following the prescriptions of the rules. As argued above, in our opinion the risk is small and its probability remote.

What is your performance benchmark?

A large fund proudly announced recently that its investments returned 7.23% for the first 6 months of the year, against a benchmark of 6.85%.

A look at the investment returns produced by prudential balanced portfolios in our Benchtest performance review reveals that the average portfolio returned 7.67%, while the default portfolio of the Benchmark Retirement Fund returned 9.78%. Clearly, the peer fund does not constitute this fund’s benchmark .

This raises the question whether the trustees should be satisfied with the returns of its fund. If the fund’s benchmark return was 6.85%, the fund has outperformed its benchmark but has underperformed the average of its peers.

Typically trustees would be guided by its investment consultants when constructing a benchmark portfolio that will be used to calculate the benchmark return of the fund.

Do trustees really have an in-depth understanding of how their benchmark portfolio is constructed and how the particular portfolio structure will respond to varying market conditions? Do trustees really know whether the benchmark portfolio truly captures the desired outcomes for the fund’s investments under different market conditions? Should trustees then not be concerned about outperforming their own benchmark, as this may be indicative of the actual portfolio structure taking higher or lower risks than what was intended?

We would suggest that, despite any internal benchmarks, every fund whose membership represents a normal demographic profile, should also measure its performance against that of its peers, which in essence represents ‘best practice’ for funds with a normal demographic profile. Ideally the investment consultant would analyse and explain the difference in performance between the peer manager and the benchmark portfolio.

RFS staff movements

We would like to welcome Austin Thirion and Rudigar van Wyk who both joined us on 1 February. Austin, previously in the employ of Alexander Forbes, took up duties as administrator in our team responsible for the Retirement Fund for Local Authorities. Rudigar, previously in the employ of Metropolitan took up duties as portfolio manager responsible for the Standard Bank Namibia Retirement Fund. We look forward to these two new staff strengthening our team and contributing towards the peace of mind we strive to instill in client trustees.

News from Namfisa

The new requirements of the latest quarterly reporting template

New requirements summarised
We have prepared a summary of what Namfisa is envisaging all funds to report on a quarterly basis, according to the latest draft that can be downloaded here...

Urgent action is required.
Principal officers are advised to study these requirements in detail. These requirements are a tall order to be complied with on a quarterly basis and it will be another nail in the coffin of any fund that cannot afford to employ a full time principal officer! This should become abundantly clear from a study of these requirements. Since Namfisa apparently is not prepared to entertain any comment the industry must deliberate on how to approach this challenge as a matter of urgency. We believe that as a ‘rule of thumb’, funds with less than 1,000 members will find it difficult to comply with these requirements. This could result in the number of private pension funds be cut down from around 90 to not more than 12.

Cost for members likely to increase by 20%
As we commented in our previous newsletter, trustees are put under ever increasing pressure and trusteeship will soon become so onerous that funds will be forced to employ full time trustees. Being able to afford a full time principal officer will no longer suffice and this is likely to further reduce the number of employer sponsored funds that still can afford such an expensive structure to possibly only 2 or 3, outside the GIPF. The management costs per member per month can be expected to rise substantially. We believe that the additional cost burden per member per year that will result from these requirements can easily amount to between N$ 150 and N$ 250. Considering that current cost per member per annum is somewhere between N$ 800 and N$ 1,200 per annum, the severe impact of these new requirements should be of serious concern to funds, their members and Namfisa!

Principal officers need to take action.
We suggest that principal officers sensitise their relevant service providers to start gearing up for providing this information and to set up the contractual framework for providing these services to the fund.

A substantial amount of detail required to be reported on will have to be provided by pension funds’ asset managers. On behalf of our clients, we have already made all asset managers aware of the prospective quarterly reporting our mutual clients will be required to submit to Namfisa. We have forwarded the latest template of this quarterly report and have requested the managers to consider section 3 detail that mutual clients will require from their asset managers. We have requested managers to gear up for assisting our clients in this regard. We have suggested to these managers to advise our clients of any concern in this regard and to raise any issues they believe need to be taken up by any institution or association in the interests of industry stakeholders in good time. To date we have not received any feedback.

Regulation 28 and 29 due for proclamation

According to a report in IJG daily of 16 August, these regulations “…will be gazetted in 2 weeks…” (i.e. first week in September) according to the Namibian, citing the Minister of Finance.

News from the market

Imposition of VET levy postponed

Although this news was splashed all over our media, for the benefit of those that missed these reports the levy will not be introduced on 1 September but only at a later date still to be announced. The notification can be downloaded here…

Investec, Sanlam, Prudential, RMB, Absa, Stanlib lose millions

It was recently reported in various Namibian financial media that a number of prominent financial institutions lost in the region of N$ 900 million through the liquidation of SA based engineering company, First Strut.

On behalf of our clients we made enquiry with all Namibian investment managers whether any of their Namibian pension fund clients’ capital may have been compromised as the result of this insolvency and can report back the following:

• Allan Gray – no exposure
• Capricorn – no exposure
• Investec – no exposure
• Investment Solutions  - at portfolio level less than 0.01%
• Momentum – no exposure
• Namibia Asset Management – no exposure
• OMIGNAM – no exposure
• Prudential – no exposure
• Sanlam investment products – no exposure
• Sanlam Unit Trust Managers – no exposure
• Stanlib – no exposure

Clients are advised to check with their investment managers if there is any doubt in this regard.

For more detail on this debacle read the article that appeared in the Namibian of 6 August. Click here...

Media snippets
(for pension fund trustees and service providers)

Pensioner’s financial future shockingly bleak

The 2013 Benchmark survey published annually by Sanlam (not to be confused with our Benchmark Retirement Fund) provides some unsettling statistics about the financial position of pensioners in SA. No doubt the picture is no brighter in Namibia either. An article by TJ Strydom that appeared in Times Live on 13 August, concludes with the following suggestions:

• Save more - 15% of your salary instead of the average 12% of salary, or more, if you can afford it;
• Avoid spending on luxuries that are soon forgotten. Be disciplined to save more;
• Always preserve retirement savings on changing jobs;
• Ensure your fund trustees and/or employer negotiate a well-designed and cost-effective retirement savings plan. Don't abdicate responsibility to these parties, but get involved in the process;
• Retire later if possible; and
• Find part-time work even after formal retirement.

Read the full article here...

Media snippets
(for investors and employers)

Pressing need to deleverage raises spectre of deflation

Few can remember much about the 1930s, the last time deflation reigned.  Furthermore, we all tend to have an inflation “bias” as inflation ruled for many decades in our life experience. People are so used to it that they cannot imagine the opposite monetary environment.

Read the article in Money Marketing of 15 August here…

Three things to look for in a winning company

For some wisdom on what makes a winning company read this article by Felicity Duncan that appeared in Moneyweb of 19 August 2013. Felicity suggests the following as the key ingredients:

• A good business produces a good product or service that customers buy;
• A good business has a sustainable competitive advantage;
• A good company has a good management team with plans for the future.

And finally...

"Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other.
~ Oscar Ameringer, "the Mark Twain of American Socialism."

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.