Dear reader

In this newsletter we provide the usual extract of our commentary on investment markets; we comment on the position of Inland Revenue with regard to tax debt and tax directives and the consequences for dependants and housing loans provided for in the PF’s Act; we provide a summary of key findings of the Sanlam Benchtest Survey on SA umbrella funds; we provide feedback on Namfisa reporting and Namfisa inspections and links to a few interesting articles that appeared in various media.

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Regards

Tilman Friedrich

Tilman Friedrich's Industry Forum

Benchtest Monthly 06.2014

In June the average prudential balanced portfolio returned 1.81% (May: 1.52%). Top performer is Metropolitan (2.52%); Investment Solutions (1.49%) takes the bottom spot. For the 3 month period Namibia Asset Management is top performer outperforming the ‘average’ by roughly 0.6%. On the other end of the scale Stanlib underperformed the ‘average’ by 0.8%.

Over most periods measured, from 3 months to 10 years, our performance graphs show that equities outperformed the best performing prudential balanced portfolio. Adding in dividends of somewhere between 2% and 4%, equities have in fact outperformed over all periods. Barring a few exceptions our performance graphs also show that high equity portfolios have outperformed low equity portfolios as the result of equities having outperformed the other lower risk asset classes such as property, bonds and cash.

The following shows that SA equities have passed their peak at the end of 2007 in real terms, much more so in nominal terms. They are now significantly above the trend line of the index since the beginning of 1988 which represents a normalised commencement date and covering a period of 26 ½ years. This graph also shows that the index has been pausing below the trend line regularly.



The investor should in the first instance be wary of investing when the market is above the trend line as it currently evidently is. It is thus not the right time to increase one’s equity exposure to the local equity market now but to rather wait for the market to retract. What about foreign markets though?

Read our full commentary, find out how these and other developments impact on our investment views and download Benchtest 06.2014, here...

Tax debt and tax directives

In previous newsletters we have addressed both these issues and the difficulties these present to funds, their members and the administrator.

In our last newsletter we expressed our opinion that Inland Revenue is contravening section 37A of the Pension Funds Act when claiming arrears tax, or a tax debt, from a benefit.

Namfisa approached Inland Revenue about these topics. The following specific concerns were raised in this context:

• If a member borrows for housing purposes as contemplated in section 19(5) of the Pension Funds Act, a fund may not be able to recover the loan from the member where a benefit becomes payable to the member and the member has a tax debt with Inland Revenue.
  
  In its response Inland Revenue advises that it acts well within its powers in doing so and suggests that funds should obtain from Inland Revenue a ‘goodstanding certificate’ before granting a loan to a member.
  
  Our comment here is that the member’s tax status may change over time since the time the loan was granted, as a result of which this problem cannot be addressed effectively by this procedure. The current state of affairs dictates that funds should no longer grant housing loans at all, negating the intention of the legislator (with section 19(5) of the Pension Funds Act) and the undeniably positive impact on the economy that such loans have.
  
  We believe that this matter warrants further investigation by funds.
   
• If a provident fund member passes away and has not submitted tax returns, his or her beneficiaries will not be paid a benefit as Inland Revenue does not issue a tax directive where any tax returns are outstanding. It was suggested that Inland Revenue should issue a directive applying the maximum tax rate.
  
  In its response Inland Revenue is rather unsympathetic to the plight of the beneficiaries, mostly minor children and insists that it will not issue a directive and wants to also use this opportunity to collect any tax debt.
  
  Inland Revenue does not distinguish between ‘current tax’ (i.e. PAYE) and tax debt, where one view is that a tax debt may not be deducted from a pension fund benefit in terms of section 37A of the Pension Funds Act.
  
  Inland Revenue’s response is that ‘tax’ is defined in the Income Tax Act as ‘any levy or tax levied under the Act’. It is of the opinion that via the appointment of an agent in terms of section 91 of the Act it has the powers to lay its hands essentially on any moneys of a person under the control of the agent (in our case the administrator).
  
  Our comment is that section 83 of the Income Tax Act, which deals with recovery of tax, makes reference to tax due becoming a debt to the Government of Namibia. It goes on to advise how this tax may be recovered from that person by the Minister filing a statement with a clerk or registrar of a competent court a statement, and such statement shall have the effect of it being a civil judgement. Read in the context of section 37A of the Pension Funds Act, our argument of the debt not being contemplated as an allowable deduction from a pension fund benefit, should become more plausible.
  
  We believe that this matter warrants further investigation by funds or an aggrieved tax payer.
   
• With regard to tax on death benefits from a pension fund, the questions of, firstly, who is taxable on the benefit and, secondly, under what section of the definition of gross income this benefit is taxable, were raised. The latter question is very important for the purpose of establishing whether the amount is subject to the average or the marginal rate of tax of the tax payer.
  
  Inland Revenue responded by merely expressing its surprise that this matter was unclear to the industry. It indicated that it might consider amending the Income Tax Act.
  
  Our comment is that this matter appears to be unclear even to Inland Revenue officials as we experience totally inconsistent treatment of such benefits between different Inland Revenue offices and between different officials. Our view is that a maximum of 34% should be taxable as a cash withdrawal benefit, provided no dependants pensions’ become payable in consequence of the member’s death; and that the taxable benefit is taxable in the hands of the beneficiary. We have received written confirmation of this interpretation from Inland Revenue (except for our view that the taxable portion represents a cash withdrawal benefit), but this is not applied consistently. It is to be noted that this is quite different where the benefit is paid by a provident fund.
   
• Inland Revenue appoints administrators as an agent to collect tax on tax exempt benefits e.g. retirement commutation and amounts to be transferred to another approved fund in terms of section 16(1)(z).
  
  In response Inland Revenue states that the employer is obliged to obtain a tax directive in respect of any amount referred to in paragraph (d) of the definition of gross income but seemingly bases its argument on ‘accrued’ as the key word. Thus even if an amount is tax exempt in terms of this paragraph (or section 16(1)(z)) for that matter, a tax directive has to be obtained and in the event of there being a tax debt, again the appointment of an agent would give it the right to collect any tax debt.
  
  In our opinion by including all benefits payable by a pension fund, but specifically excluding the lump sum on retirement, ill-health or death in paragraph (d) of the definition of gross income, these amounts in essence do not ‘exist’ for the purposes of the Income Tax Act and hence there cannot be a requirement to obtain a tax directive as contemplated in paragraph 9(3) of part II of Schedule 2 to the Act. As far as a benefit due to be transferred to another fund is concerned we would agree that the amount represents gross income in the first instance and would be exempt when transferred but it does create the opportunity for Inland Revenue to intercept these moneys at the time of issuing a tax directive that must be obtained by the fund administrator in respect of such moneys.
  
  If Inland Revenue means to say that tax directives have to be obtained in respect of lump sums that are not gross income in terms of paragraph (d) of its definition, which is not clear from its response, we believe that this matter warrants further investigation by funds or an aggrieved tax payer.

Download the letter from Inland Revenue to Namfisa on these industry concerns, here...

Sanlam benchmark survey 2014

Sanlam recently published the results of its annual survey. 100 Principal officers of stand-alone retirement funds were interviewed for this purpose. In our previous newsletter we presented some of the more interesting findings in respect of stand-alone funds.

Here are some of the more interesting findings of this survey in respect of umbrella funds:

• Larger well-established employers continue to join umbrella funds;
• The average ‘sub-fund’ in an umbrella fund has 484 members and R 297 million assets;
• 12 out of 100 stand-alone funds surveyed in 2014 indicated their intention to transfer in the next 12 months, 55 indicated they have considered it;
• Costs and reputation are the main factors influencing employers’ choice of fund;
• Main reasons for the transfer are cost savings, administrative convenience and fiduciary risk;
• There is an increased awareness of costs but understanding the cost complexities remains unsatisfactory;
• 64% of employer’s remuneration packages are based on total cost to company;
• Average employee contribution rate is 5.6% of salary;
• Average employer contribution rate is 8.5% of salary;
• Average cost of death benefits is 1.6%;
• Average cost of disability benefits is 1.2%;
• Average cost of administration is 0.8% of salary;
• Average allocation towards retirement is 10.5% of salary;
• 66% of employers provide risk benefits as part of the umbrella fund;
• Average death benefit is 3.1 times salary;
• 47% of sub funds deduct fund expenses (FSB levies, auditing fees and trustee reimbursements) from member accounts, 14% from contingency reserve and 16% include it in the administration fees;
• 83% of respondents indicated that the trustees are assisted by an investment consultant;
• 52% of respondents indicated that their consultant was independent of the sponsor;
• 31% of consultants are remunerated via commission, 24% via a negotiated fee;
• 64% of respondents felt that remuneration was commensurate with the consulting services provided;
• 69% of sub funds have a formalised strategy for rendering financial advice;
• 74% of employers offer member directed investment choice;
• 98% of sub-funds indicated that an appropriate default strategy was available for members who do not want make investment choices;
• 53% of sub funds offer life stage mandates as default strategy;
• Only 35% of employers target a pension and of these 57% target 80%+;
• 93% of employer are satisfied or very satisfied with the investment choice for these being a good variety;
• Investment feedback is provided annually by 32% of funds, half-yearly by 13%, quarterly by 37% on investment returns (77%), returns vs benchmarks (66%), portfolio asset allocation (63%), economic overview (60%) and risk analysis (41%);
• Majority of member communication is via printed material on investment performance (87%), benefit structure (87%), legislative changes (61%);
• 77% of funds make use of an internet facility;
• 42% of funds offer a net replacement ratio calculator;
• 34% of employers indicated that the umbrella fund has determined an appropriate default annuity product or are working on it, 15% have determined a product and 47% of these have selected the living annuity, 40% the guaranteed annuity;

It is concerning that 90% of members do not reassess their choices after making their initial decisions.

RFS sponsors workshop for wheels

The “Workshop for Wheels” was recently hosted by the Occupational Therapy Department at Windhoek Central Hospital. The workshop assists people who are in wheelchairs.


Pictured above, Giovanni van Wyk represented Retirement Fund Solutions at the workshop.

We received this note of appreciation.

Apples for Cancer Donation

A Bank Windhoek initiative sells apples every year to support the Cancer Association of Namibia. This year, RFS saw the opportunity to create further benefits from the initiative, by donating boxes of apples to Windhoek primary schools, to feed children who benefit from the schools' initiatives to feed orphans and vulnerable children.


Pictured above, learners from Theo Katjimune Primary receive their two boxes of apples. Ujama Karamatha handed over the apples on behalf of RFS.


Pictured above, Bethold Himumuine Primary receives the school's two boxes of apples. The handover was done on behalf of RFS by Austin Thirion.

News from Namfisa

Namfisa Statistical Bulletin – Pension funds in perspective

In the quarterly reports published by Namfisa, you will find interesting financial statistics on the financial services industries regulated by Namfisa.

Here is a summary for the 2013 financial year, values given in N$ millions:

Statement of Investment Holdings

The first statement of investment holdings is due by 15 August for 31 March 2014. The template Namfisa has circulated for completion has certain shortcomings that would prevent a meaningful compilation of this report. These were reported to Namfisa and an undertaking was given by Namfisa to review the template an to circulate and updated version of it. This has not been circulated yet by the time of finalising this newsletter.

Asset managers have in many instances not been able to commit to providing the information required in the prescribed format yet, given that the prescribed format requires revision. As it became very uncertain whether or not asset managers would be able to provide the required information in the prescribed final version in time to allow us to compile the consolidated reports for clients who have requested us to compile the consolidated report, our clients have applied for extension of the due date.

By the time of finalising this newsletter Namfisa has not responded yet.

Namfisa venturing into fund inspections

We have recently reported on Namfisa carrying out fund inspections. These inspections comprise of a Principal Officer questionnaire of some 200 questions, a Trustee Questionnaire of 34 questions, an onsite inspection of fund statutory, contractual and governance documentation, interviews with service providers, principal officer and trustees and an audit of claims, contribution reconciliations, bank reconciliations risk premium payments and fund expenses covering the past 3 financial years.

Here are some to the failings typically criticizes in the report:

Having approached Namfisa on its specific requirements as to form and content of the governance policies and documents, Namfisa advised that it cannot be of any assistance in this regard and advises that funds should develop their own documents or should use freely available templates.

• Rules failings:
  • Incorrect registered address;
  • Administrator defined as a specific service provider who no longer serves the fund;
  • Inadequate guidance on what constitutes an unclaimed benefit and how it is to be disposed of;
  • No term of office provided for the Board of Trustees;
• Statutory compliance failings:
  • Late submission of annual returns;
  • Incorrect format for reporting on regulation 28 employed in the financial statements;
• Fund governance failings:
  • No formal appraisal in place of board of trustees and chairperson;
  • No code of conduct in place for trustees;
  • No risk management policy in place;
  • No investment policy in place setting out an asset allocation strategy;
• Contractual documentation
  • Fund contractual agreements not in place or not signed (insurance policy, administration agreement, consulting agreement, investment agreement).

Media snippets
(for stakeholders of the retirement funds industry)

Index versus active fund management debate is dead

There is an on-going debate in the investment industry about the merits of index investing relative to active investing where fund managers are paid higher fees for attempting to beat the market. Most of the participants in this debate are motivated by vested interests because they are trying to promote their own businesses. This makes it difficult for investors to get a real grip on this important issue.

Read the full article by Warren Ingram in Moneyweb of 2 July 2014, here...

Death benefits and S 37C, the burden of the board of trustees

One topical question addressed in this article is ‘when does the duty to pay arise?’

A debt becomes due when the duty to pay arises. Where a debtors liability is dependent upon the performance of certain conditions, the debtor will not be in mora until a duty to pay arises, e.g. dependants of a deceased needed to be and then have been determined. Mora can arise where the debtor’s need is urgent and the creditor’s delay is unreasonable. The common belief that a fund’s duty to pay is contingent upon the expiry of the 12 month period referred to in Section 37c is not correct. The duty to pay is not dependent on this but rather whether the trustees are satisfied that they have investigated and considered with due diligence and are in a position to make a decision.

Other questions addressed are :

• What is the objective of Section 37C;
• What is the duty of the board of trustees in this regard;
• Identifying and tracing dependants;
• Do all identified dependants automatically qualify;
• What about nominated beneficiaries;
• Benefit allocations to the identified dependants.

Read the full technical guide for trustees by Liz de la Harpe, legal adviser, Glacier by Sanlam in Insurance Gateway, here...

Media snippets
(for investors and business)

Remember peak oil

It’s not too long ago that doomsday prophets foresaw the world running out of fossil fuels, presenting lots of production capacity calculations and projections of all the oil fields of the world.

With fracking, it seems a new era has dawned with production steadily increasing. Will we see fuel prizes starting to decline again and us all being better off in terms of our monthly petrol bill?

Read this interesting analysis by Felicity Duncan in Moneyweb of 17 July 2014, here...

How South Africans spend a fortune doing government’s job

“Prices [in SA] have been rising, but so have household incomes. Yet, household savings rates have been very low, and household indebtedness has risen. What’s going on here? Why are South Africans taking on debt and not saving, even though their incomes are rising and inflation is relatively well-contained?”

“It seems to me that South Africans face some fairly unique expenses that their peers in many other countries do not have, and that this is perhaps why our savings rate is so low compared to peer countries. Specifically, I think that many South Africans must pay for services that the government provides in other countries, so they end up paying double – they pay taxes, and then they privately pay for the services their taxes should cover.”

Read this interesting article by Felicity Duncan in Moneyweb of 14 July 2014, here...

Are we Namibians in a more fortunate position of getting value for the money we spend on taxes? How do our readers see this?

The best financial advice you might ever read

“I always spend money on things I did not budget for, which leaves me in a dire cash flow position every month.

I do not consume alcohol or cigarettes and always take a lunch box to work. I do not buy a lot of luxury items and reduce spending on clothing to a minimum.

My primary bank account has had a parallel excel spreadsheet since June 2010, so I know exactly what I spend my money on. I've spent 18.36% of the last four years' revenue on vehicles, 8.07% on insurance and repairs on the vehicles and 12.82% on my parents.

When emergency strikes in the family I am the guy to go. The majority of the financial burdens are carried by me.”

Robin Gibson from Harvard House replies to the conundrum a reader who is feeling pressure from supporting his wider family.

Read his advice in Moneyweb of 9 July 2014, here...

And finally...

Some advice worth contemplating

• Never depend on single income. Make investment to create a second source.
• If you buy things you do not need, soon you will have to sell things you need.
• Do not save what is left after spending but spend what is left after saving.
• Never test the depth of a river with both feet.
• Do not put all eggs in one basket.
• Honesty is a very expensive gift. Do not expect it from cheap people.

~ Warren Buffet

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.