Important notes and reminders

Quarter 3 of 2018 SIH returns – forewarning

The SIH return at 30 September 2018 is due to be submitted by 15 November (note that the 45 days period remains in place).

NAMFISA levies

• Funds with year-end of August 2018 need to have submitted their 2nd levy return and payments by 25 September 2018; September 2018 year-ends by 25 October 2018.
• Funds with year-end of February 2018 need to have submitted their 1st levy return and payments by 25 September; March 2018 year-ends by 25 October 2018.
• Funds with year-end of February 2018 need to submit their final levy return and payment by 28 February 2019; January 2018 year-ends need to submit their final levy return and payment by 31 January 2019.

Newsletter

Dear reader

In our investment commentary we offer guidance to Benchmark investors, in particular, how to decide whether to invest in a prudential balanced portfolio rather than a smooth growth portfolio or vise-versa. We provide some feedback from functions recently held by RFS and the Benchmark Retirement Fund. Under ‘legal snippets’, we opine on whether or not outstanding housing loans can be offset against a member’s fund credit prior to exiting the fund and whether NAMFISA has the powers to refuse to register rules that provide for such offsetting.

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...

...and make a point of reading what our clients say about us in the ‘Compliments’ section. It should give you a good appreciation of who and what we are!

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

Regards

Tilman Friedrich

1. Current status

 2. GIPF and SOE’s severed

 3. Compulsory National Pension Fund (rough estimate of 50% membership and 30% asset loss)

 Clearly, the remnants of the ‘private retirement funds industry’, after the government initiatives will hardly be worth any economic interest! The largest umbrella fund currently administers more members than are likely to be left over in the existing umbrella funds market segment. On the private funds side there will be hardly room for one administrator and there will be no room left for competition. The table assumes that the Retirement for Local Authorities will be part of the SOE net, but should this not be the case indeed, the result will be marginally better for the ‘private retirement funds industry’.

If NAMFISA were to retain its current size and shape and were to proportionately raise its levies to recover its operating costs from the remnants of the industry based on fund assets, it would have to lift its current levies by close to 700%. In a previous newsletter we estimated the current total levy effectively borne by pension fund members to be around N$ 200 per member per year. Extrapolating this as suggested we can look forward to a levy of N$ 1,300 per member per annum, substantially more than what the current average administration fee per member per annum amounts to. Alternatively, NAMFISA would have to reduce its total expenditure by 85%. To rub more salt into this wound we will still see further substantial increases in the levy with the implementation of the FIM Bill.

Perhaps government should then rather manage the industry to its final consequence by nationalising it and incorporating all retirement provision on a compulsory basis (under a new Namibia National Retirement Institution?).  This could at the same time obviate the need for a regulator for a large part of the financial services industry.

Will we wake up before it is too late?

The FIM Bill –  posing a serious risk to employers

The FIM Bill is hailed by government as the biggest legal reform in Namibia since Independence! Sounds like something we should be proud of? I would rather call it a revolution and must state my clear preference for an evolution. I am not sure Namibia can stomach this revolution and there are likely to be casualties like with any other revolution. Will it be the Minister of Finance, his economics adviser, NAMFISA, industry players like RFS?

I believe we must stand back now and reconsider where we are heading. Forget about all the water that went down river Jordan over the past 10 plus years. This is not about anybody’s pride; this is about the future of retirement provision in Namibia, your retirement and mine!

Trustees, principal officers and administrator will have to measure up to professional standards or face hefty penalties. Yet our training institutions have not even started to establish undergraduate, let alone post-graduate curriculums to allow these role players to achieve the levels of skill that will be required of them! This is however an indispensable precondition when government intends to revolutionise the financial services industry!

To give our readers a glimpse of what is coming let’s first look at the objects of the Bill as defined in section 2 as to foster -

• the financial soundness of financial institutions and financial intermediaries;
• the stability of the financial institutions and markets sector;
• the highest standards of conduct of business by financial institutions and financial intermediaries;
• the fairness, efficiency and orderliness of the financial institutions and markets sector;
• the protection of consumers of financial services;
• the promotion of public awareness and understanding of financial institutions and financial intermediaries;
• the reduction and deterrence of financial crime.

Note that there is no reference to the interests of the employer or fund sponsor who has been the sole driving force behind pension funds and their tremendous growth to date unlike Australia for example that has compulsory contributions by employers and employees and that prides itself of owning the world’s 4th largest pension pot after the US, UK and Japan.

One should take these objects one-by-one and assess whether they will be achieved with the FIM Bill. I am afraid, in various respects the FIM Bill will actually achieve the opposite of what it sets out to do.

Here are just a few of the facts of the Bill you may not be aware of – there are many more:

• NAMFISA will be vested with immense subordinate legislative power without any proper checks and balances to ensure fair and equitable use of power;
• NAMFISA can make subsidiary law in any form or manner without the supervision by parliament’s or the executive
• The Act comprises of over 600 pages and 468 sections
• The Act shall prevail over all other laws (including the Income Tax Act, with the exception of the Namibian Constitution)
• The Act comprises of a total of 11 Chapters of which 6 Chapters comprising of 135 sections directly relevant to trustees, principal officers and service providers and these parties must be able to demonstrate proficiency and meet the ‘fit and proper’ requirements
• The Act is complemented to date by 37 regulations and standards - quite a few more to follow - that are directly relevant to trustees, principal officers and service providers and these parties must be able to demonstrate proficiency and meet the ‘fit and proper’ requirements
• Fit and proper means “An individual meets the competence and capability requirement of the fit and proper criteria if that individual has an appropriate range of skills or experience or both, as applicable, to understand, operate and manage the activities and financial affairs of the registered financial institution (retirement fund) or financial intermediary...”
• In the event of death the member’s nomination form will be instructive to the trustees, even if a known dependant was not nominated, with limited discretion concerning the allocation proportions to the persons nominated
• No deduction is permissible from a member’s benefit for damages caused to the employer through the employee’s theft, dishonesty, fraud or misconduct unless a court order has been obtained
• Deductions from a member’s benefit are now permissible in respect of any court order served on the fund against a member’s benefit, even a court order resulting from the member’s insolvency
• Permissible deductions from either a benefit or the member’s fund credit –
  • Income tax, including tax arrears
  • Loan granted by the fund to a member pursuant to the regulations
  • Settlement of loan granted by a person other than the employer and guaranteed by the fund
  • Maintenance under maintenance order, but such deduction ranks lower than settlement of a loan granted prior to maintenance order
  • Deduction ordered by a court
• Administrative penalties will be due to NAMFISA, thus creating a self interest
• The Retirement Funds Chapter contains 13 contraventions that are criminal offences punishable with fines between up to N$ 1 and N$ 5 million and imprisonment of up to between 2 and 10 years for contraventions of an administrative nature such as -
  • Failure to notify NAMFISA of appointment of the principal officer
  • Failure to notify Namfisa of any material matter that may seriously prejudice the financial viability of the fund
  • Failure to disclose to NAMFISA any payment received from a contractor of the fund
  • Failure to deposit a copy of the actuarial valuation report with 180 days of the end of the valuation report
  • Failure to pay over the contributions to a fund
  • Failure to observe the prescriptions concerning the receiving and processing of contributions
  • Failure to provide members and beneficiaries with copies of the rules of the fund
  • Failure to provide a member on request with copies of certain documents
• The trustees are responsible to ascertain that the rules comply with the act and any other relevant law
• The trustees have 12 months from promulgation of Bill into Act to amend rules where they are not compliant with the Act
• Annual financial statements have to be submitted within 90 days, requiring performance of interim testing before year end, which would lead to increased time and increased costs of these audits, and there may also be an increased element of estimation involved from the administrator to close out the records earlier.  This is despite the requirements that funds will be required to report extensively, within 45 days of the end of every quarter as envisaged by the OCoA reporting.

Many of us may very soon become criminals on the basis of the numerous criminal offences the FIM Bill contains for administrative failings. We will then have a criminal record and will be precluded from serving in any fiduciary position. Since many of the trustees and service providers are senior officials of one or other company this may in no time create a serious problem for the Namibian economy. Has anyone spent any thought on what these draconian measures may imply for the Namibian economy?

We understand the Bill has been signed off by the attorney general and is ready to be tabled in parliament this year still. The only prospective avenue left to stop this Bill is via a public hearing by the relevant parliamentary standing committee.

Will we wake up before it is too late?

The One Chart of Accounts initiative of NAMFISA
A contribution by Kai Friedrich

Yet another prospective nail in the coffin of pension funds in Namibia may be the envisaged ‘One Chart of Accounts’ (OCoA) initiative by NAMFISA.

We must caution clients up front what to expect to come the way of pension funds and to gear them up accordingly. After having invested substantial time on efforts to see how we can assist our pension funds clients, we unfortunately have to concede defeat! We do not have the capacity or the expertise to gather all the information manually from different sources and we do not have the tools to collate the information in the format required. To collect and collate the data in a format that supports the electronic updating of the ERS system requires the development of a fairly specialized and complex financial model.

Clients should therefore proactively engage service providers who can assist with this process. We suggest this should preferably be a joint effort of all pension funds in Namibia, ideally coordinated and facilitated by RFIN. To develop an appropriate product will not come cheaply and neither will the process of obtaining, collating and downloading the information into the ERS system. Pension funds have the choice of joining forces for the sake of attaining the greatest possible economies of scale in our small industry or to follow divergent routes for achieving this objective.

Some of the high level issues we identified during the latest testing are reflected under the below bullets. If not addressed by NAMFISA, OCoA will result in a lot of additional work for pension funds and costs to members. A rough estimate from our side is that in its current format the ERS completion of the OCoA, including all data gathering from different sources and consolidation thereof, will take anything between 1 and 5 full working days per pension fund, depending on size and number of parties involved.

Without having gone through the full process of collecting and collating of data and updating ERS, we have communicated a number of initial concerns to NAMFISA as per the following bullets. We suggested that one or more of its staff members actually complete a return using live data themselves to understand all the issues raised by us. We will share any response from NAMFISA’s side once received.

• The ERS format of the OCoA has in excess of 40 individual sections per pension fund. Each section needs to be ‘validated & saved’ individually even if it does not apply to an industry.
• All mandatory fields need to be completed, even if not applicable to a fund. That means all fields need to have a ‘0’ inserted at least.
• Each asset manager a fund employs needs to provide information on a specific Excel sheet template in a specific format. To consolidate this information in an automated fashion using Excel is virtually impossible.
• The asset manager information referred to above is not clearly distinguishable from the rest of the information on the ERS return and falls within other fund financial information, making the consolidation process even more tedious.
• The 4 different Excel sheets underlying the information to be submitted on ERS have a number of tabs per Excel sheet. It is currently not possible to complete these using simple Excel formulas and therefore each sheet needs to be manually completed.
• There is currently no upload function to load information directly to ERS, which means that all the information from the Excel sheets needs to be manually retyped in ERS. Even to simply copy over values from Excel to ERS does not work since ERS requires a very specific format of input.
• ERS and the Excel sheets do not always follow the exact same layout and it is difficult to transfer information across easily from Excel to ERS.
• There is no cross check to ensure information inserted is actually agreeing to the Fund’s financial records.
• The excessive amount of information required will make it difficult for NAMFISA to meaningfully extract any valuable information for analysis or reporting. Funds will most likely be inundated with follow up questions once returns are submitted.

Now, trustees and principal officers, please see for yourself, follow links below:

Funds will be required to submit this report quarterly. For a glimpse of what this report will look like, if you are a principal officer or trustee, click here...

To see our comments and to appreciate what funds are facing, click here...

Will we wake up before it is too late?

Investment regulations reduce your prospective pension by 20%!

As we will show in next month’s newsletter, through simple arithmetic it becomes evident that Namibian retirement funds prospective investment returns are more than 20% lower now than what the funding model implicitly requires. This will produce a pension that will be 20% lower than what the pension fund original aimed to deliver to its members.

This calculation assumes that unlisted investments will generate returns equivalent to conventional equity and that local investments will generate returns equivalent to what the funding model implicitly expects rather than lower returns due to the increased supply of capital.

Will we wake up before it is too late?

VAT on asset manager fees may reduce investment returns by up to 0.23%!

Most trustees will be aware of the announcement by the Minister of Finance during the latest budget speech, that asset management fees will become VATable. At the moment, pension funds do not pay VAT on the fees charged by their investment managers. Although not clear yet, if all asset management fees will become VATable independent of to whom they are delivered, e.g. to pension funds, it would imply that asset management fees, typically amounting to anything between 0.5% and around 1.5% of asset managed, will increase by anything between 0.075% and 0.225%, reducing investment returns by the same margin!

Will we wake up before it is too late?

We are about to kill the goose that lays the golden eggs!

The pension funds industry grew to where it is today, one may argue, despite all legislation and regulation. I will hasten to add that until the advent of the FIM Bill, the legislative framework was still fairly simple while the regulatory framework was very modest, even though on a steep incline over the more recent past!

Pension funds were not created by government. Until today and even with the implementation of the FIM Bill there is no legal obligation on employers to establish a pension fund for their employees. So why did employers establish pension funds? I guess there were two main reasons. Firstly, employer undeniably have a moral responsibility towards their employees, to provide for key needs of their employees other than their daily needs for living, primarily retirement, death and disablement. Secondly, Employers, operating in a competitive labour market were also over the years forced to offer retirement benefits in their effort to attract and retain staff, as more and more employers introduced pension funds, to the point where most employers nowadays have a pension fund.

But why a compulsory pension fund rather than any other discretionary savings scheme? Well, for one, the Income Tax Act created a uniquely favourable tax regime for pension funds. The employer may deduct its costs of contributing to a fund but of course this is in any event an expense incurred in the production of income that would be tax deductible. Furthermore, a pension fund is tax exempt unlike any other business so all income generated by the fund is not taxed while any benefits eventually paid out by the fund generally enjoy a beneficial tax treatment. Finally, employees are allowed to contribute and to deduct these contributions from their taxable income.

Unfortunately, the tax benefit for the employee with regard to his contributions became ever less meaningful having been pegged at N$ 40,000 for many years now. For all intents and purposes the tax regime from an employee’s point of view now rather presents a disincentive as all contributions above the N$ 40,000 peg is effectively taxed twice, once before it is paid into the fund, and again when it is paid out by the fund in the form of a benefit. Of course we all know well enough to appreciate that we would not have participated in a pension fund or any other savings vehicle had the employer left it to us what to do with the additional salary intended to provide for retirement and other unforeseen mishaps in life.

From the employee’s perspective, often unknown to the employee, his pension fund offers a few key advantages above any other savings vehicle. Section 37, I would argue, is the key provision of the Pension Funds Act in that it provides for the strongest conceivable protection regime for an employee’s retirement savings while vesting the responsibility on trustees to dispose of a member’s benefit in the event of his demise in the interest of the most vulnerable survivors at times even against any ill-conceived or ill-considered directions of the employee.

In short the Pension Funds Act supported by the Income Tax Act, once offered an incredibly beneficial and secure framework for employees retirement savings that no other savings vehicle came close to by any measure. As history has proven, the legislative framework promoted the employer’s objectives while encouraging his employees to ‘play along’.

With the advent of the FIM Bill, Namibia will be moving into a new era. Employers and their objective in retirement provision for employees will be severed from retirement provision and will henceforth be required to support the regulator in its prudential and market conduct supervisory endeavours. Onerous obligations will be placed on the employer as employer and as sponsor of a fund. The employer will be prohibited from using the pension fund in support of its business objectives to attract and retain staff while the employer including its directors and officers, in their personal capacity, will be facing serious risks. For the employer, there will be no incentive to offer a pension fund under the FIM Bill anymore and there is no legal compulsion to do so.

For the employee the key advantage of a pension fund, namely the strong protection previously offered by Section 37 of the Pension Funds Act has for all intents and purposes been removed from the FIM Bill. For employees earning below the minimum income tax threshold, the income tax regime offers no contribution incentive. For those earning above this threshold, the income tax regime will in many cases actually offer a disincentive. As far at the tax exempt status of pension funds is concerned vis-à-vis a personal investment, the benefit thereof is not all that meaningful when one looks at the income pension funds typically generate. The largest portion of investments of around 65% is invested in shares that produce dividends. Dividends are currently tax free for the individual investor excepting dividend withholding tax that some foreign countries levy on Namibian investors but are likely to soon become taxable at a rate of 15%, which would create a small advantage for pension funds. The second largest portion of investment is typically comprised of fixed interest investments generating interest income. The individual investor would pay interest withholding tax on local interest income of a mere 10% and may be exposed to interest withholding tax on interested earned from foreign investments. This basically leaves some rental income of fairly little impact that pension funds typically generate and that is tax free when earned by a pension fund while the individual investor would have to pay tax at marginal rates on any rental income.

Besides the considerations discussed in this article, the afore going articles on industry levies, regulatory reporting, a high local investment content, the FIM Bill and VAT, the writing seems to be on the wall! This golden egg laying goose will die of all the blood-letting if we do not back track on all the initiatives in the pipeline that unfortunately will all result in more and more blood-letting.

Will we wake up before it is too late?

Analyses of 2017 regulations and standards

Regulations:

• RF.R.5.3  Terms & conditions on which a board may distribute some or all of an actuarial surplus
• RF.R.5.7   The rate of interest payable on the value of a benefit or a right to a benefit  not transferred before the expiration of the applicable period pursuant to section 262(9)(c
• RF.R.5.8   The protection of unpaid contributions of an employer and the rate of interest payable on contributions not transmitted or received pursuant to section 262 (9)(a) and (b).

The above regulations were covered in the Benchtest 2018-02 newsletter issued in February.

Standards:

• RF.S.5.11  Alternative forms for the  payment of pensions for the purposes of defined contributions funds
• RF.S.5.12  The conditions pursuant to which a fund may be exempted from Chapter 5 or from any provisions of Chapter 5
• RF.S.5.13  Requirements for a communication strategy
• RF.S.5.14  Requirements for the annual report of the fund to its members
• RF.S.5.15  Requirements for the annual report of a fund to NAMFISA
• RF.S.5.17  Categories of persons having an interest in the compliance of a retirement fund with the provisions of section 262  and the requirements for reports that must be submitted to such persons
• RF.S.5.18 Matters to be included in investment policy statement
• RF.S.5.19  Matters to be communicated to members and contributing employers and minimum standards for such communication
• RF.S.5.20 Matters to be included in a code of conduct
• RF.S.5.22 Transfer of any business from a fund to another fund or from any other person to a fund
• RF.S.5.23 Fees that may be charged for copies of certain docs

In the Benchtest 2018-03 newsletter we addressed RF.S.5.11.
In the Benchtest 2018-04 newsletter we addressed RF.S.5.12 and RF.S.5.13.
In the Benchtest 2018-05 newsletter we addressed RF.S.5.14 and RF.S.5.15.
In the Benchtest 2018-06 newsletter we addressed RF.S.5.18 and RF.S.5.19
In the Benchtest 2018-07 newsletter we addressed RF.S.5.20, RF.S.5.22 and RF.S.5.23
In the Benchtest 2018-08 newsletter we addressed RF.S.5.17

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 Chairman of the RFS Board, and retired chairperson, and now trustee, of the Benchmark Retirement Fund.

The Benchmark Retirement Fund - Flagship of umbrella funds in Namibia
By Paul-Gordon, /Guidao-Oab, Benchmark Product Manager

Annual member meeting

Members of the Benchmark Retirement Fund were updated on latest developments within the fund, on its financial position and on investment portfolios and returns at the recent annual member meeting. Fund auditor Robert Grant of KPMG presented an overview of the financial position and results for the year ended 31 December 2017. Kai Friedrich, principal officer provided a summary of the actuarial findings of SAPN, actuaries of the fund. Hein Klee of NMG presented on the fund portfolios, returns and the philosophy of the Benchmark Default portfolio as investment consultant to the fund. Finally Günter Pfeifer presented developments within the fund with regard to product and rules. Proceedings were led professionally and efficiently by Master (or should it be Madam?) of Ceremonies, Afra Schimming-Chase who also serves on the board of the fund.


Guest speaker, Brett St Clair spoke on ‘The Era of Digitalism’.


The audience listening attentively to the speakers.

Download the annual report, here...

Paul-Gordon /Guidao-Oab joined RFS as Manager: Audit and Compliance in May 2016 and has then moved into the position of Benchmark Product Manager. Paul holds a B Compt degree from Unisa and has completed his articles with SGA.

News from RFS

RFS client function

RFS once again hosted a client function on 5 September at ‘de Kayak’, a very nicely prepared venue that can only be recommended. Catering was exceptional and the evening was certainly a pleasant experience! Guest speaker Sophia Amoo-Chimunda, former head of prudential institutions at NAMFISA spoke on the implications of the FIM Bill and key differences between it and the Pension Funds Act and Brett St Clair speaking on ‘Digital Transformation – the Path to Innovation’.

Going by the feedback below, the audience was generally appreciative and enjoyed the evening. A pity for the relatively large number of confirmations that did not manage to attend. We believe you missed something and trust that we will have the pleasure of your company at our next client function!


A glimpse of the audience.


Our guest speakers, Brett St Clair and Sohpia Amoo-Chimunda being handed tokens of appreciation by Managing Director Marthinuz Fabianus.

And here is some client feedback...

“Thank you for the effort in organising and hosting the event. The presentations done were all very interesting and value adding. The hosting was also done very well, and I can assure you myself and my colleagues enjoyed the evening and the interactions.” (S Pienaar, Pupkewitz group)

“Thank you for the comprehensive feedback from our Fund as well as the very interesting talk by your "Nowist", Brett St Clair who tried to get the old pensioners into the 21st century. It was interesting and thought provoking, if not scary to try to stay ahead. The social function was also a very enjoyable time to meet up with old colleagues and friends from our working lives. Keep up the good work at our own three letter "RFS", which at least speak of Solutions without having to curse to get to the Future.” (W vd Vyver)

“I wish to thank the entire RFS team for the –

• privilege to attend just another well-organized client function.
• hard work by each and every individual to ensure that it would be a pleasant event.
• extremely, fresh Belgian treats – they could melt in one’s mouth!

• complaints
• status of Chart of Accounts project
• regulatory developments – FIM Bill
• industry statistics overview
• investments in SPV’s
• designated persons at funds
• requirements of the Income Tax Act
• overview of changes to pension fund regulations