Important notes and reminders

Annual ERS returns due

In a communication from NAMFISA of 8 January, retirement funds are reminded that the annual ERS returns are due by 31 January.
In summary the following sections will need to be completed:

• General details - Principal Officer / Consultant to complete
• Governance Part 1 - Principal Officer / Consultant to complete
• Governance Part 2 - Principal Officer / Consultant to complete
• Governance Part 3A - Principal Officer / Consultant to complete
• Governance Part 3B - Principal Officer / Consultant to complete
• Balance Sheet - RFS to complete
• Income Statement - RFS to complete
• Investments - RFS to complete (information to be by funds’ asset managers)

The notice of submission of these returns was very late and we suggest that funds request extension until 15 February 2017 as it will be very difficult to meet the due date. The NAMFISA application form can be downloaded here…

Quarterly SIH returns due

The quarterly SIH returns are due by 15 February. Principal officers are required to sign off the hard copies of the return. Principal officers need to ascertain that this requirement is met and that the return is submitted on or before 15 February to avoid being penalised at the rate of N$ 500 per day.

Namibian residents owning shares in SA companies – here is some important information

If you own shares in your own name in SA companies be aware of estate duty consequences. Download the note of caution by Hartmuth van Alphen here…

Comments on one chart of account under FIM Bill due

Whilst RFS had assigned Kai Friedrich to assist and advise NAMFISA in this regard, our voice will not receive the necessary weight to prevent extensive new requirement from being imposed at a significant cost to pension fund members in the near future.

We urge all principal officers to acquaint themselves with this topic and to support our efforts in this regard by submitting their comments by not later than 3 February.

The request for submissions can be downloaded here…

Here are some of our main concerns in this regard:

NAMFISA intends to set up a single interface for uploading data from the industry. The data NAMFISA intends to collect however, in practice comes from different sources. It will not be purposeful to design an interface where data from different sources are in a single input document as this would mean manual intervention by pension funds. This should at all cost be avoided and from NAMFISA perspective it should really make no difference how the interfaces are set up. To make the process efficient, there should be a separate interface for each source of data. The following data sources typically exist in the pension funds industry:

• Financial data – from the funds’ general ledgers
• Investment data – from the funds’ asset managers
• Member data – from the funds administrators’ member data bases
• Extraneous and non-financial data:
  • Valuation related – from the valuator
  • Indirect loans – from the sponsoring bank
  • Claims ageing – manual or customised reporting
  • Other member data manipulation – manual or customised reporting

It seems NAMFISA may not be aware of the fact that there are these separate sources of data and putting all into a single interface will not serve the purpose of automating the data capturing process for pension funds. Each separate source should have a separate interface and should be uploaded as a separate process.

We also believe that NAMFISA should collect only ‘raw data’ from the different data sources. Data providers should not be required to do any data manipulation. NAMFISA obviously has its own information and statistical requirements for which ‘raw data’ has to be manipulated.  If this is done by NAMFISA, it means that only its systems will have to be coded and it also means that the manipulation will be done in a systematic and consistent manner. If data providers are required to do the data manipulation, it would mean that each provider’s system has to be coded specifically for NAMFISA requirements. This makes the process significantly more costly for members as an estimated 20 or so systems will have to be customised for the NAMFISA requirements, and is likely to produce inconsistent results that may not be reliable for NAMFISA’s purposes.

Finally, as the NAMFISA framework stands now, it requires vast volumes of data from pension funds (and the other regulated institutions). At this stage it appears that it will degenerate into a monster of a data base that NAMFISA will establish and that will have to be updated by pension funds and their service providers on a quarterly basis in NAMFISA’s quest for managing risk. The resources this will require in terms of data storage capacity and processing power is likely to be similar to all IT systems of all regulated financial institutions put together. Sanity should prevail here in taking this process forward step by step. First collect the key information only, process and analyse it and see to what extent it will serve the purpose of managing the industry risk. As we have pointed out before – the trustees are accountable for managing the risks of their pension funds and can be taken to court by fund members and NAMFISA. Yet we do not believe there is a single fund where risk is managed at the level of detail that NAMFISA now seems to be intent to do. NAMFISA effectively now takes the responsibility of trustees for managing risk upon itself! Do we still need trustees, or can the trustees perhaps be exonerated for not managing the risks of their funds anymore because it is done by NAMFISA in so much more detail based on industry wide benchmarks and parameters that would not be available to trustees?

Newsletter

Dear reader

In this newsletter we draw attention to a (possibly) vast and costly new NAMFISA reporting requirement for funds if funds do not act now, we present the closing act on purchase of member owned annuities (for now?), we examine why additional voluntary contributions are not tax deductible and we make suggestion for raising financial literacy amongst fund members.

The topical articles from various media should not be overlooked – they are carefully selected for the value they add to the management of pension funds and the financial well-being of individuals.

In our commentary on global investment markets we look at what we can expect of financial markets in 2017.

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 12.2016

In December the average prudential balanced portfolio returned 0.42% (November: 0.59%). Top performer is Prudential (1.31%); while Allan Gray (-0.19%) takes the bottom spot. For the 3 month period Prudential, takes top spot, outperforming the ‘average’ by roughly 1.7%. On the other end of the scale EMH Prescient underperformed the ‘average’ by 1.3%.

What will 2017 bring us?

Since June 2014 to end of December 2016, the JSE Allshare index made no progress and has been hovering around the 2016 year end level of 50,000. The investor in the JSE Allshare index thus had a return of zero percent. Taking into account dividends of around 3.3% would have still produced a negative real return of 1.4% to end of December with an average inflation rate of 4.7%!


Now consider the above graph. This depicts the performance of the more common investment portfolios employed by pension funds in Namibia. The blue bars to the right represent balanced portfolios comprising of a mix of asset classes with an equity exposure of between 60% and 65%. The grey bars represent more conservative portfolios comprising of a mix of asset classes but an equity exposure of mostly below 40%. Bearing in mind that the investor’s real return on the JSE Allshare index would have been minus 1.4% over the very same period, most pension fund investors should take comfort in the picture presented by the above graph. Over this period the typical balanced pension fund portfolio still returned 2.2% above inflation before asset manager fees, an outperformance of the JSE Allshare index plus dividends by 3.6%. Still, this is a very low real return considering that pension funds are built on the premise of investments returning 5% above inflation, after fees. Clearly this shows that rebalancing is under way in financial markets and this we expect to continue for the next year and longer!

Read part 6 of the Benchtest 12.2016 newsletter to find out what our investment views are. Download it here...

Transfer of retirement capital to a member-owned annuity

RFS has been pursuing this topic relentlessly with insurers and South African and Namibian tax authorities and regulators for many years in an effort to obtain clarity on the legal framework, any pitfalls and the potential risks these might pose to RFS as administrator and to the trustees of retirement funds it administers.

Through these tireless efforts we have at long last reached a point where we believe that both RFS and the trustees of retirement funds it administers are sufficiently exonerated by Inland Revenue and NAMFISA, in the event of any recourse by a member for the consequence of his or her retirement capital having been transferred to an insurer to arrange a pension in the name of the retiree. Our first concern was with regard to the transaction not having been treated correctly for tax purposes. Our second concern was with regard to the possible loss of the protection offered by section 37 A and B of the Pension Funds Act, in the event of the demise of the insurance company to which the capital was transferred.

At long last NAMFISA has now confirmed to us in writing that it considers ‘PN25/1/1/p’ an official NAMFISA circular although it is a facsimile sent to former manager of Old Mutual employee benefits that was complemented by a note addressed ‘To Whom it May Concern’. These two documents bear no resemblance to official NAMFISA circulars. NAMFISA now confirmed the content of these two documents, that a retiree can arrange a member owned annuity from an insurer with his or her retirement capital in a retirement fund and that the protection of section 37 A and B would extend to this capital once it resides in the insurance company. This addresses our concern with regard to the Pension Funds Act.

On our tax concern, Inland Revenue a while ago confirmed in writing to the Life Assurers Association of Namibia that retirement capital from a pension fund would not be taxable if it is applied to purchase an annuity in the name of the retiree, on the basis of the argument that such purchase is not a voluntary transaction but is a requirement in terms of the relevant fund’s rules. This argument of course implies that only annuity purchases by members of a pension fund will be tax free (or rather not gross income) but not those by a member of a provident fund. Inland Revenue has set conditions that have to be observed when such transactions are entered into. Firstly, the policy must mirror the extensive protection afforded to pension fund capital under sections 37 A and B of the Pension Funds Act. Secondly the rules of the purchasing fund must oblige the member to purchase an annuity and must make provision for the annuity to be purchased in the name of the member. As far as the first part is concerned, we as administrators cannot verify this and we will expect that the receiving insurance company assumes this responsibility. As far as the second part is concerned, RFS will ascertain that these are met.

Can your employees deduct voluntary contributions to the fund?

The contract of employment

One principle of the Income Tax Act is that expenses can only be claimed for tax purposes if they were incurred in the production of income (refer section 17.(1)(a).

In the case of employees Inland Revenue will not easily accept any claim for expenses incurred by the employee. An employee can only claim expenses that he is required to incur in terms of his employment contract. In other words the salary you earn is dependent on you incurring certain costs so these costs are incurred in the production of income.

If an employer can formulate the employment contract in such a way that a pension contribution in respect of the employee’s bonus is an obligation, the employee should be able to claim that expense. If the decision is left to each employee, the employer should find that it is not possible to formulate it in the contract as an obligation. This does not mean that every employee has to have the same contract of employment. So certain employee categories or certain employees can have a special provision in their contract of employment that others do not have, to make the contribution obligatory.

The fund rules

Most fund rules provide for voluntary contributions by members. I caution to use this clause as the heading is problematic, referring to ‘voluntary’. As pointed out above, the word ‘voluntary’ means it cannot be an obligatory contribution by the employee and would thus not be incurred in the production of income.

It is important that the rules of the fund mirror the employee’s employment contract. Thus, if a contribution calculated on a member’s bonus is a condition of employment, it should not be referred to as ‘voluntary contribution’ in the fund’s rules.

The Income Tax Act on fund contributions

The definition of ‘pension fund’ requires that the rules of a fund provide in (b)(i) that ‘…all annual contributions of a recurrent nature of the fund shall be in accordance with specified scales…’. The definition of ‘provident fund’ lays down the same requirement. Typically, this refers to the contribution percentages at which members contribute on a monthly basis. The definitions do not make any reference to any other contributions.

Section 17 of the IT Act deals with ‘General deductions allowed in determination of taxable income’. Section 17(1)(n)(i), sets out that the employee may deduct ‘…by way of current contributions [which are required to be in accordance with specified scales per definition of ‘pension fund’ and ‘provident fund’] in the year of assessment and directs that ‘…such contribution is a condition of employment…’ The IT Act contains no other specific provision that allows any deduction for contributions to a pension fund, and here I do not refer to a transfer of accumulated contributions to another fund.

Conclusion

As set out above, the principle of the IT Act militates against an employee deducting any expense that he was not required to incur in the production of income [and that can only be achieved through the contract of employment].

This sets out the dilemma of employers wanting to allow staff to make additional contributions to their fund and indicates what route the employer and the fund should take to achieve their goal of having employees contribute to the fund in respect of their bonus.

I would caution employers though not to create an impression towards employees that voluntary contributions are tax deductible, or worse, to offset voluntary contributions from an employee’s salary in determining the taxable income unless you have obtained comfort that Inland Revenue will allow these as a deduction for tax purposes.

Pension fund governance - a toolbox for trustees

To verify whether your fund service providers are duly registered by NAMFISA, download the list here...

The following documents can be further adapted with the assistance of RFS.

• Download the privacy policy here...
• Download a draft rule dealing with the appointment of the board of trustees here...
• Download the code of ethics policy here...
• Download the generic communication policy here...
• Download the generic risk management policy here...
• Download the generic service provider self-assessment here...
• Download the generic conflict-of-interest policy here...
• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...
• Download the generic trustee code of conduct here...
• Download the unclaimed benefits policy here...

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.

Our sorry state of financial literacy
by Marthinuz Fabianus

The popular and powerful adage “knowledge is power” has been traced back to the 15th century.  I consider myself fortunate to have learnt it early on when the emblem of my brand new primary school in Arandis, named after Rössing Uranium Mine, was unveiled in the early 80’s with this inscription. However, in recent times, this quote has been re-coined to “shared knowledge is power”. I cannot agree more with this, as it brings to mind the unfortunate state of ignorance about financial matters of the majority of members of pension funds in Namibia. Despite some initiatives, notably by the Financial Literacy Initiative (FLI) of the Ministry of Finance and NAMFISA’s consumer education campaign, I am afraid not much if anything at all seems to be done to improve the level of financial illiteracy amongst pension fund members.

The FLI that arguably may have reached the biggest audience, seems to focus mainly on personal and business finance, whilst NAMFISA’s consumer education campaign that one would have expected to deal more with pension funds, seems to have died a natural death. I would like to believe that for the majority of grassroots members of pension funds, their single biggest asset when they hang up their working tools to retire, would be their pension fund savings.  Pension fund concepts are probably amongst the most complex to understand and relate for many pension fund members. However, if pension fund assets amount to more than 70% of our country’s GDP, then the owners of these assets need to be made more knowledgeable about the workings of the vehicle hosting their largest single asset.

Now reading this you are probably thinking “yeah right, tell us how to improve their knowledge”, or “you try making members understand pension fund benefits and investments!” Well, I am not professing to have much needed answers, however first step is for pension fund stakeholders to recognise that not much has been done and resolve to do somewhat more than hitherto has been the case.

Over years of my experience with pension funds, I found that employers that take an active interest, place great value on pension funds as an extension of employee benefits and recognise it as key in attracting and retaining staff, tend to be more concerned about pension fund members’ need to understand the benefits offered. These employers in addition to their contributions to their employees’ pension fund would also employ a person(s) in their human resources team to look specifically after the affairs of the pension fund either as fund Principal Officer or assistant to the fund’s Principal Officer.

Members of funds would mostly trust their own colleague if they needed advice or need to be referred for advice on pension fund matters. If a person in such position builds up all required knowledge on the structure, workings and relevant laws applying to pension funds, he or she can become a key asset to an employer. With the trust the in-house person would automatically command amongst less literate members of the fund, I believe such a person can be the appropriate medium to educate members on matters concerning their fund and related employee benefits matters. This person has the added advantage that he or she better knows and understands the culture of the employer and other employer information that may be too sensitive to entrust to outside service providers and has access to various resources of the employer as may be needed in rendering a service to members of the fund. I believe investment in such a resource by the average size employer can thus be invaluable in increasing the level of financial literacy amongst pension fund members.

Marthinuz Fabianus is Deputy Managing Director of Retirement Fund Solutions. He graduated from Namibian University of Science & Technology with a Diploma in Commerce and Bachelors in Business Management. He completed a senior management development programme from University of Stellenbosch and various short courses including a macro-economic policy course which he completed at the International Training Centre of the ILO in Turin, Italy. Marthinuz has 23 years' industry experience.

Media snippets
(for stakeholders of the retirement funds industry)

So you think you can pick next year’s winning fund?

“One of the biggest challenges to any investor is overcoming their own behavioural biases. A lot of the time, the biggest risk to our wealth is ourselves.

Studies in behavioural finance have shown how investors often act irrationally and are swayed more by emotion than reason. One of biggest behavioural biases we face is that we overestimate our own abilities. We think we are smarter than we actually are.

This is what leads a number of investors to think that they can pick the best fund from year to year. They believe that they have the ability to earn better returns by moving between unit trusts than simply sticking to one manager over the long term.”

The results of a Moneyweb study shows why the answer is not to pick last year’s winner.

Read the article by Patrick Cairns in Moneyweb of 17 January 2017, here…

Bull and Bear - a consensus view of the market over the next 12 months
15 January 2017

The Bull & Bear report is a collation of the performance expectations of seven South African Asset Managers over the coming 12 months.   

100% say

• they expect SA inflation to trend downwards
• they expect Global inflation to trend upwards

86% say

• they are neutral on Resources
• they are bullish on Value
• they are bearish on Euro-Zone bonds
• they are bearish on UK bonds
• they are neutral on UK equities
• they are neutral on South American equities
• they are neutral on Emerging Europe equities

Asset managers’ view of the current SA Equity market

Keep calm and carry on investing, says Allan Gray

“A year ago investors were desperately seeking ways to take money offshore with the rand trading at R15.60/US$. The rand is now trading at R 13.60/US$ and this quest has gone quiet. This is counterintuitive: surely a dollar at R13.60 is a better investment than a dollar at R15.50 if the fundamentals are the same? The deficit on the current account is similar to a year ago, the fiscal position unchanged and, if anything, the probability of President Jacob Zuma leaving office early has lessened despite ever-more damning evidence of corruption and mismanagement in the ruling party. People have just chosen to worry about these issues a bit less. Maybe the level of concern is normal now and was too extreme in December 2015/January 2016.”

Download the commentary by Andrew Lapping, Chief Investment Officer of Allan Gray here…

Media snippets
(for investors and business)

Namibian stats at a glance

Do you know what the poverty line is or what our main imports and main exports are, or what the main drivers of inflation are? If you are interested to find out more, download the document here...

How well can you trust your boss?

“Here's the funny thing about integrity: It's one of the most crucial ingredients of effective leadership, but it's notoriously hard to measure. One reason is that integrity is somewhat contextual; psychologists have found that the same person may act with integrity in some situations but not others. And it's true that corrupt, mischievous work cultures tend to unleash deviant behaviors even in those who'd behave ethically under other circumstances. By the same token, "prosocial," ethical cultures discourage naughtiness, forcing even those with relatively little integrity to act in uncharacteristically moral ways (at least for a while).”

• Look at the work culture the boss operates within the business;
• Being too focused on achievements and career makes one selfish and can justify nasty behaviour towards others;
• Employees’ assessment of the integrity of their boss can be fairly predictive;
• Creative people are more likely to cheat;
• Charisma is often psychopathy in disguise;
• Boring often means trustworthy;
• Arguably the most relevant factor when it comes to assessing integrity is emotional intelligence.

Read the interesting post by TC Primuzic in FastCompany, here...

And finally...

“While honesty is lazy—it simply involves recalling facts and one’s own experience—deception takes a lot of effort, creativity, and intelligence.”
~ Friedrich Nietzsche