NAMFISA levies

• Funds with year-end of April 2019 need to have submitted their 2nd levy return and payments by 24 May 2019;
• Funds with year-end of October 2019 need to have submitted their 1st levy returns and payments by 24 May 2019;
• Funds with year-end of April 2018 need to submit their final levy return and payment by 30 April 2019; May 2018 year-ends need to submit their final levy return and payment by 31 May 2019.

Phasing out of cheques - reminder
 
Local banks no longer accept any cheques issued after 1 February. Note that cheques will expire after 6 months, thus 1 August. Cheques issued on 1 February 2019 will thus be valid only up to 31 July 2019.

Registered service providers

Certain pension fund service providers need to be registered by NAMFISA and need to report to NAMFISA regularly

These service providers are:-

• Registered Investment Managers
• Registered Stockbrokers
• Registered Linked Investment Service Providers
• Registered Unit Trust Management Companies
• Registered Unlisted Investment Managers
• Registered Special Purpose Vehicles
• Registered Long-term brokers
• Registered Long-term insurers

If you want to find out whether your service providers are registered, or whether you need to establish directly from NAMFISA because the service provider does not appear on the list, use this link...

Check out our new retirement calculator

Our web based retirement and risk shortfall calculator has been enhanced and updated to assist you to determine how much you should contribute additionally, either by way of lump sum or regular salary based contribution, to get to your target income at retirement, death or disablement.

Try it out. Here is the link...



Dear reader

In this newsletter we continue the discussion on how a National Pension Fund can be established.

In our investment commentary in the monthly Performance Review as at 31 March 2019, we comment on the current state of the JSE.

We present in full length our commentary ‘Can we allow pension fund returns to be diluted ever more?’ We share some news from RFS and the market that should not be missed. We ask the question whether it still makes sense to hold onto your private fund? We also explain Namibia’s debt metrics in layman’s terms.

In legal snippets we examine whether fund rules should provide for a ‘default benefit’ where a member does not claim his/her benefit.

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



Rationale for the proposed approach to the operationalisation of the National Pension Fund (NPF)

Background

In considering previous proposals for operationalising the NPF, it would seem that they have all without any known exception, based their suggested models on social protection schemes of first world countries and generally countries with much bigger economies in a typical ‘copy and paste’ approach. This is with regard to key aspects such as contributions and benefit design, governance framework, management and administration of the fund, participation (i.e. compulsory or should exemption be granted to occupational schemes), investments of funds and regulatory supervision etc.

Let us comment briefly on some of these below:

Administration

It is a well-known fact that public institutions of first world countries including those responsible for managing social protection schemes are resource-wise well capacitated and capitalised. These institutions have been in operation for many years and have earned public trust. It is to be noted that enhanced and comprehensive social protection schemes which set international benchmarks as referenced by international bodies and their experts, are managed by these trusted and efficient public institutions. Occupational pension schemes in these countries are not as popular due to the comprehensive benefits and coverage of social protection schemes. Where employers offer occupational schemes, these serve to rather provide additional coverage, topping up on entrenched minimum benefits provided by social protection schemes.

By contrast, Namibia has well-functioning and efficiently managed occupational pension schemes, whilst there is virtually no meaningful contributory social protection coverage. Our occupational schemes have hitherto been the backbone of our financial stability and represent more than 70% of GDP. Since occupational pension funds are managed by private institutions, which are managed on a professional, world class basis. As third world country, we are not spared with the shortage of skills, administrative inefficiencies and generally poor functioning of public institutions resulting in lack of trust in these institutions such as the Social Security Commission (SSC) in this case. It would be inconceivable for a person able to contribute meaningfully towards a contributory pension scheme, to entrust the administration and general management of their pension savings to our SSC with confidence.  

Governance & Regulatory Supervision

It is also indisputable that first world countries have advanced governance structures and regulatory bodies that serve as international benchmarks. Developing a policy for NPF based on first world social security schemes would naturally be followed by concomitant development of a statutory and regulatory frameworks based on first world institutions. In this process, attempts would typically be made to adapt these first world models to our developing environment, as it were, by trying to fit the proverbial ‘square peg in a round hole’.

In Namibia, occupational pension schemes are regulated by Namibia Financial Institutions Supervisory Authority (NAMFISA). NAMFISA regulates pension funds based on the Pension Funds Act (Act 24 of 1956). Even though this law has recently been criticised (mainly for the fact that it is a pre-colonial law), this is probably one of the best crafted laws that have allowed pension funds to grow to their current indispensability for our national economy. The Pension Funds Act inarguably offers best protection of assets against creditors of fund members and their dependents as well as protection to dependents of a deceased member. NAMFISA amongst others also regulates other financial institutions that offer complementary services to pension funds such as asset managers, unit trust managers and insurance companies. These complementary institutions have all developed simultaneously and in the process helped contribute to the industry which is today hailed internationally and helps Namibia in global development indexes.  

NAMFISA as public institution has in the process also developed hot on the heels in keeping up with the fast evolving pension funds’ industry. Obviously due to competitive and profit driven nature of service entities in the industry, the private and occupational pension fund industry has developed far ahead of the public institutions entrusted with the management of social protection schemes. Good governance is an integral part and prerequisite for successful and efficient management of any service institution and for fostering public trust. The pension fund industry has thus thrived on the back of well-developed governance structures which have taken many years to build to this stage.  

Participation

The point has been made that countries with model economies and well-functioning social security systems inherently do not have large private sector and occupational pension schemes. This is because the social security schemes provide comprehensive coverage and meet the general financial needs of the workers and their dependents. These social security schemes by and large are compulsory and contributory in nature. Empirically, the majority of contributory persons are formally employed, whilst those informally employed participate largely on a voluntary basis.

In a developing country like Namibia, we have a huge informally employed population. Whilst empirical information suggests that some developing countries with large economies such as India, China, Philippines etc. are exploring ways of providing some coverage to persons in the informal sector, examples of tested success cases if any are few and far between. There are reports of a study on the informal labour sector which if/when concluded may offer insight on how this sector could be provided with some coverage of contributory social security benefits, or in this case, how they can meaningfully participate in the NPF.

The above background suggests that participation in the NPF on a compulsory basis should realistically be targeted at formally employed persons. The case has also been made that private and occupational pension schemes in Namibia have been successfully managed and a robust regulatory environment has imbued this.    
Investments

As pointed out above, NAMFISA is also regulator for the Namibia Stock Exchange as well as Unit Trust Funds, Asset Managers, Insurance Companies and very recently Unlisted Investment Managers through which the bulk of pension fund assets are invested.

At the risk of sounding repetitive, all these institutions have developed to world class status over the years in support and service to pension funds.

This discussion will continue and be concluded on in the following newsletters.

Read part 6 of the Monthly Review of Portfolio Performance to 31 March 2019 to find out what our investment views are. Download it here...

Can we allow pension fund returns to be diluted ever more?

Investors in general and pension fund members more specifically will not be happy with the returns their investments have generated. Up to the end of December 2018, the average prudential balanced portfolio’s return of 7.7% has barely outperformed inflation of 5.2% and has just managed to match the money market return of 7.5% over a 5 year period but fell far short of both the money market return and its long-term performance objective over any shorter periods. It only really managed to achieve its long-term objective of inflation plus 5.5%, before fees, over 10 years and longer.

Now consider the same parameters to the end of January 2019 where the average prudential balanced portfolio’s return of 8.0% represents a slightly improved the outperformance inflation of 5.2% and of the money market return of 7.5% over a 5 year period but still falling far short of both the money market portfolio and its long-term performance objective over all shorter periods, once again only really managing to achieve its long-term objective of inflation plus 5.5% over 10 years and longer.

Finally let’s move the goal post by another month to the end of February 2019. Now the average prudential balanced portfolio’s return of 8.2% represents a slightly improved outperformance of inflation of 5.1% and of the money market return of 7.6% over a 5 year period but still falling far short of both the money market portfolio and its long-term performance objective over any shorter periods. It only managed to achieve its long-term objective of inflation plus 5.5% over 10 years and longer.

What this does show is that fortunes for the more volatile and higher risk prudential balanced portfolios turn rather rapidly and adding two months of positive, just slightly positive returns, add the end of the period and taking off 2 months at the start of the 5 year period can make quite a difference to the end result. We added a cumulative 4% for January and February 2019 and dropped a cumulative 1.5% for January and February 2014.

Can we look forward to the results of the first two months of 2019 signifying a turnaround of the fortunes of equities? Certainly as far as local equities are concerned, they have been far behind the curve in terms of medium term actual yields versus long-term yield expectations. Since the beginning of 1987 the real return was a mediocre 5.8% including dividends – that’s over the past 32 years! Compare this to the S&P 500’s 6.6% real return over the same 32 year period where one would expect the risk premium to require local equities to produce a higher return than US equities. Compare local equities 32 year return also with long term (116 years) returns of around 7.5% for SA equities and 6.5% for US equities. Of course this is not the only consideration. It is common cause that current low returns are the result of central bank intervention in the markets since the financial crisis and that we are currently en route to a normalization of monetary policy.

In the US, the Fed rate currently represents a real return of 1%, which at times has been negative, so at least a bit of normalization although the gap needs to open up further to around 2% in order to get back to its long-term average. Markets tend to factor in the future to the extent it is reasonably foreseeable, so it is likely that at least some further normalization has already been factored in that is still due to come about. US inflation currently shows a clear downward trend which means that the gap will be opened up as the result of declining inflation, where it was already down to 1.2% recently but has picked up a bit to 1.5% of late.

Our concern is thus not so much that equities may not meet their long-term return expectations going forward.  Our concern is much more that pension fund investment returns are diluted ever more by what we have been referring to as a serious onslaught on the pensions industry that seems to be considered a duck that lays the golden egg. Consider the ever increasing cost as a result of increasing regulatory and governance requirements. Consider fiscal and monetary objectives of healing all sorts of ailments government and our national economy are experiencing where pension fund assets are forced into unlisted investments and where the local investment allocation will soon reach 45%, higher caps having been mooted already.

In our commentary in the September column of this investment brief, we speculated that the investment regulations will result in pension funds’ equity allocation effectively being capped at 60% as opposed to an implicit allocation of 75% that the current typical pension fund model presupposes. This will dilute expected long-term pension fund returns down form 6.3% to 4.6% before fees. After fees we will thus be looking at a net return of below 4% per annum whereas the pension model requires 5.5%.

We believe that this is a very unfortunate development pension fund members are facing without them being able to do much about it. It seems our government finances are under so much pressure that short-term survival rather than long-term planning defines government policies, to our own detriment. South Africa scores only 52 points on the Melbourne Mercer global pensions index, putting it into the 3rd lowest of 7 categories, where the highest ranked country is Netherlands with a score of more than 80. Namibia will be below SA by some margin just on the basis of our old age grant being quite inferior to that of SA and we are likely to move down further as declining pension fund investment returns will further dilute the overall adequacy of our pension system. The direction should be the opposite and should be driven by supportive national policies. It does not seem we have the means for such policies. What does this mean for Namibia’s future credit rating?

Conclusion

What can a pension fund member do about this dilemma? Well the majority of members, particularly on the lower half of the income spectrum will not be able to do anything about this, as they will not be able to afford any other savings. They will have to hope that government will be able to look after them once they have retired and do not have the means of their own to do so. On the upper half of the income spectrum, savers can and must apply their total discretionary capital to make up the effect of declining pension fund investment returns. Unfortunately this will not be possible through investment in Namibia as every conventional savings mechanism is subject to the same or similar dilution. It is common cause that equities are an essential component of every investment strategy and are really the only asset class that offers the opportunity to make good the shortfall experienced on pension investments in Namibia. Consequently investors need to use every opportunity to expatriate their discretionary capital to invest primarily in foreign equities.

Unfortunately the Rand is currently substantially undervalued at around 14.3 to the US Dollar and should be closer to 12. It is thus not a good time to expatriate discretionary capital right now. It is perhaps not a bad idea then to keep this capital in the money market, while it returns a real rate of about 2% p.a., in anticipation of an opportunity to expatriate the capital. As far as our knowledge goes, approved expatriation applications are valid for 6 months. Typically obtaining approval to transfer money offshore is quite a constraining factor, where timing will be crucial, and perhaps one should ensure that one has the approval in your pocket and renew if an opportunity does not arise within the next 6 months.

Does it still make sense to hold on to your private fund?

As things stand, trustees are already overwhelmed by the governance requirements but up to now most still managed to muddle through with the assistance of their service providers. Fortunately the consequences of any non-compliance so far were not too serious. The pressure will continue to increase and with the advent of FIM Bill matters will become substantially more onerous and trustees will be facing substantially higher risks relating to compliance failures.

Trustees and principal officers are facing joint and several liability for compliance and governance failures and this risk will have to be mitigated through professionalisation of trusteeship and principal-officership. The ‘going rate’ for a part-time professional in this specialist filed is in the region of N$ 300,000 p.a. In addition other operating costs will also increase substantially as the result of the increasing requirements.

Trustees and fund sponsors are well advised to seriously consider whether it will be viable to retain the fund’s separate identity or to move the fund into an umbrella fund where the governance requirements are transferred to the umbrella fund.

Trustees should also be aware that such a transfer to an umbrella fund will become significantly more onerous and thus more costly once the FIM Bill becomes effective. Although our current information indicates that the FIM Bill is not on the parliamentary schedule for this year, it will only give a short reprieve.

A draft standard has been issued under the FIM Bill dealing with transfers and amalgamations between funds referenced RF.S.5.22. If you want to acquaint yourself with these requirements follow this link... You will no doubt realise that such a transaction will become very onerous under the FIM Bill.

And some sound advice to any board of trustees contemplating to move their private fund to an umbrella fund. Do carry out a proper due diligence before you take this decision. Follow this link for some guidance in this regard that recently appeared in Money magazine...

Namibia’s debt in layman’s terms

One hears a lot about Namibia’s government debt in the media and in private discussions. One also regularly reads and hears that the budget deficit should not exceed 3% of GDP. I am sure many people will be aware that the situation is bad but very few can actually relate to the figures being bandied about.  Again how does one relate to this benchmark?

The following two graphs are interesting in this context These graphs are from the Capricorn Asset Management Daily Brief.

Graph 1 shows that the debt to GDP ratio will reach 47% in the current fiscal year, to increase further the year after and only start decreasing in 2022, if things go as planned. The debt excludes government guarantees.

Graph 1


Graph 2 includes government guarantees to SOE’s. The picture now looks worse and will continue to worsen from 54% of GDP over the current year to 58% by the end of 2023, if everything goes as planned.

Graph 2


To make these metrics more palatable for the layman, one should express them in terms of a layman’s financial metrics. Relating these figures to one’s own finances, the concept of GDP is really not relevant and one has to eliminate this concept when trying to relate debt and deficit to one’s own finances. What is relevant is the income we earn. At national level it is expressed as a percentage of GDP. Namibia’s revenue for the past few years has, and estimated revenue for the next few years will be in the region of 30% of GDP. For the current fiscal year, GDP is estimated to amount to N$ 205 billion. Namibia’s national revenue will thus be around N$ 60 billion (N$ 205 billion times 30%). Government revenue in an employee’s terms equates to his/her total remuneration. If an internationally accepted benchmark for government deficit is 3% of GDP, this equates to 10% (3% divided by 30%) of the employee’s remuneration. So this says that you should be fine if you borrow 10% of your annual income annually to fund capital expenditure, provided you repay enough of your accumulated debt so that it does not exceed the total debt ceiling. Of course government is able to borrow at substantially lower rates of interest than the employee. This means that an employee should actually borrow less than 10% of his total income on an annually recurring basis to recognise the higher rate of interest the employee will pay. In the case of Namibia we are currently borrowing at the rate of 4% of GDP or 13% of government revenue.

Now turning to the debt ceiling of 30% of GDP that governments should ideally not exceed, this equates to 100% (30% divided by 30%) of the employees total annual income, to be adjusted still for the higher rate of interest the employee will have to pay. Thus, an employee earning say N$ 50,000 per month and N$ 600,000 per annum should thus have total debt of less than N$ 600,000. In the case of Namibia our total public debt is currently 50% of GDP or around 1.7 times (or 170%) of annual government revenue. So if this was me earning N$ 50,000 per month, I would currently have a total debt of N$ 1 million.

If I had to pay back my total debt of N$ 1 million at 11.75% (housing loan interest rate) over 20 years, it would consume 22% of my total remuneration. This is well below the 30% the Labour Act allows as the maximum deduction from an employee’s salary.

I venture to say that very few employees’ financial position would be considered healthy if the norms applied to national finances were to be applied to the man in the street. Something evidently does not gel when assessing the financial position of an individual and that of a country.

• Download the privacy policy here...
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• Download the generic trustee performance appraisal form here…
• Download the generic investment policy here...
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• Download the unclaimed benefits policy here...
• Download the list of fund service providers duly registered by NAMFISA here... 
• Download the Principal Officer performance appraisal form here...
• Download the revised service provider self-assessment here...

Benchmark Retirement Fund welcomes Komatsu

Benchmark Retirement Fund takes further strides on its course to become the biggest retirement fund in Namibia (just joking... it will never get anywhere close to the GIPF). Nevertheless, it could by now be the 4th largest fund in Namibia in terms of assets under management, including the GIPF, thanks also to the latest sign of confidence by Komatsu in Namibia that has taken the decision to join the Fund. We welcome Komatsu in Namibia and its staff and look forward to serving you beyond expectation for many years to come!

The Retirement Fund Solutions SKW youth soccer tournament

The annual Retirement Fund Solutions SKW youth soccer tournament was staged at SKW sport fields. 67 teams and some 900 players from under 7 up to under 17 put their prowess on display over 3 days. SKW won in all but one age group. Pictured: the SKW cohorts.

The annual Retirement Fund Solutions SKW youth soccer tournament was staged at SKW sport fields. 67 teams and some 900 players from under 7 up to under 17 put their prowess on display over 3 days. SKW won in all but one age group. Pictured: the trainer cadre of SKW.

RFS once again sponsors Retirement Fund Solutions SKW youth soccer tournament

The annual Retirement Fund Solutions SKW youth soccer tournament was staged at SKW sport fields in Olympia on the last weekend of March. 67 teams and some 900 players from under 7 up to under 17 put their prowess on display over 3 days, some games played in the very welcome rain at that weekend.

SKW must have drawn the lucky ticket, winning all but one age group.


Above: the trainer cadre of SKW. 


Above: the SKW cohorts.


Above: young stars in action.

Above: Kai Friedrich, RFS  tournament sponsor, handing over the cup to the winning team representing his favourite club.

RFS entrusted with the administration of NBC Retirement Fund

It is an interesting phenomenon that many of the funds RFS is serving as administrators, regularly put out on tender fund administration services to their fund meaning that RFS’ competitors get another bite at this bait every 3 years. So much more disappointing that funds administered by our competitors hardly ever reciprocate by affording the market an opportunity to showcase their capabilities.

It is so much more an achievement and a reason to be proud when RFS is re-appointed by one of its clients in conclusion of its tender process as happened in the case of the NBC Retirement Fund.

We express our sincere gratitude to the board of trustees of the NBC Retirement Fund for its gesture of support and look forward to serving the fund and its stakeholders beyond expectations for many years to come!

Pension fund industry meeting presentation

The last pension funds industry meeting was held on 19 March 2019.

If you missed the presentation, download it here...



Should retirement funds have a default benefit if members don’t claim their retirement benefits?
A guest contribution by Andreen Moncur BA (Law )

Retirement funds offering member investment choice often invest members’ retirement savings in default portfolios if members don’t exercise timely investment choices. Similarly, funds provide default risk benefits where members fail to exercise timely options regarding cover levels. But should funds pay a default benefit to members who don’t claim their retirement benefits within a reasonable time after retirement date? A recent case I consulted on seems to indicate they should. A member retired almost fifteen years ago and didn’t claim his retirement benefit-he refused to exercise any of his options at retirement, stating that that he would defer all such decisions until he had received “divine guidance”. To date, the member has not claimed his benefit nor exercised any associated options.

The rules of the fund in force when the member retired provided that his claim to his benefit prescribed three years after retirement. His benefit then reverted to the fund, but the fund must reinstate his benefit if he subsequently claims it. NAMFISA Circular PI/PF/07/2015 prohibiting the reversion of unclaimed benefits to a retirement fund and requiring funds to pay any benefits unclaimed for five years or longer to the Guardian’s Fund, is not applicable in this case because the member’s benefit had already reverted to the fund several years earlier. In all other instances the problem will be defining exactly what an unclaimed retirement benefit is when a member does not choose his retirement benefit in a timely manner. In such case, there is no unclaimed benefit until such time as the member exercises the available options because his input is required to determine the exact nature of his benefit. In the case I referred to, the member had to choose how much of his accrued retirement benefit to commute and then choose between three types of pensions. The fund in question is a pension fund so at least two-thirds of members’ accrued retirement capital must be used to secure pensions for them.

By failing to choose and claim his benefit before it prescribed, the member lost the investment returns on the benefit. When the member’s benefit reverted to the fund, he forfeited his benefit and it became a fund asset. The member now has no benefit in the fund until he claims the forfeited benefit. In this case, the amount due to him would be that due to him on his retirement date all those years ago. No late payment interest is payable on the benefit as from the introduction of such interest because no benefit existed. Late payment interest would be payable only as from the date on which the member requests payment of the asset until the date of payment thereof. He may take up to one-third thereof in cash and the balance must be used to secure a pension for him according to the rules in force when he retired.

Can trustees do anything to prevent retirees from using funds to “park” their retirement benefits until they choose to claim their benefits? The answer is yes.

Firstly, trustees can amend the fund rules to stipulate that retirement benefit options must be exercised within a reasonable period of the member’s retirement but in any event no later than the end of the tax year in which the member retires. Three months is a reasonable period because members are alerted to their impending retirement and the options to be exercised far in advance of their retirement.

Is there now more value locally than there is offshore?

“Over the past few years South African asset managers have preferred holding international equities to investing in the local stock market. Their view has been that the potential returns offshore have been much higher.
They have been proven correct too. Over the five years to the end of March 2019 the MSCI World Index was up 11.72% per annum in rand terms, while the FTSE/JSE Top 40 had grown only 6.44% per annum.
However, this view is starting to shift. While many fund managers still believe that there are better opportunities offshore, the perception of the local stock market is improving.
The Old Mutual MacroSolutions boutique, which recently published its annual Long-Term Perspectives, now expects that over the next five years, the potential returns from the JSE are higher than those investors can expect offshore...”

Read the full article by Patrick Cairns in Moneyweb of 9 April 2019, here...

Severe illness cover increasingly included in group cover risk offering

“There has been an increased preference among employers to include severe illness products in their group risk benefit suite over the last few years.

“We think the increased prevalence of these severe illnesses – cancer in particular – is driving this trend,” says Viresh Maharaj, chief executive for corporate sales and marketing at Sanlam Employee Benefits.

Message to South Africans: the good times will be back shortly

“Listening to the daily corruption report from the Commission of Inquiry into State Capture one can easily miss some shards of optimism glinting through the cloud cover.

FTI Consulting’s The future of South Africa report released this week has some encouraging words from CEOs such as Discovery’s Adrian Gore and Goldman Sachs’s sub-Saharan Africa CEO Colin Coleman, who breaks rank with many of his peers in forecasting reasonably strong growth of 1.9% in 2019 and 2.8% by 2021.

Coleman says a good target for SA is to get back to 3% growth within three to four years. “During the Thabo Mbeki years, we were growing at 4% and during the Jacob Zuma years, at 1.5%. Over the combined period we had an average 3% growth rate.”

Gore introduces some much-needed optimism into the picture, pointing out that life in SA gets better with time. “Our GDP is 2.5 times the size it was in 1994 on a dollar basis; formal housing has increased by 131% from 1996 to 2016; new HIV infections are down 60% from 1999-2016; and the murder rate per 100 000 is down 50% from 1994 to 2017.”

South Africans tend to wallow in gloom, which leads them to make erroneous predictions...”

If good times will be back shortly in SA it will of course have a positive spin-off effect for the Namibian economy. So let’s hope that these predictions will come true!

Read the full article by Ciaran Ryan in Moneyweb of 11 April 2019, here...