NAMFISA levies

• Funds with year-end of August 2020 need to have submitted their 2nd levy returns and payments by 25 September 2020;
• Funds with year-end of February 2020 need to have submitted their 1st levy returns and payments by 25 September 2020; and
• Funds with year-end of September 2019 need to submit their final levy returns and payments by 30 September 2020.

• this link to the letter dealing with VAT refunds, and
• this link to the letter dealing with ITAS issues.

Pension fund governance - a toolbox for trustees

• 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 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...
• 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...

Registered service providers
UPDATED May 2020

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 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...

If you need any assistance with your personal financial planning, you are welcome to get in touch with Annemarie Nel (tel 061-446 073) or with Kristof Lerch (tel 061-446 042)



Dear reader

In this newsletter we address the following topics:

In ‘Important notes and reminders’, read about:

• Are you ready for the FIM Act?
• VAT refunds and ITAS issues

In ‘Tilman Friedrich’s industry forum’ we present:

• Assessing the impact of penalties and fines under the FIM Act;
• How do you benchmark the cost of fund administration?
• Will equity markets take Corona in a stride?
• Should you now buy, sell or stay put?

• We welcome new staff;
• We provide an overview of the fund administrators market; and
• We draw attention to ‘Important administrative circulars issued by RFS’ since the previous newsletter.

• The virtual pension funds industry meeting held on 29 July; and
• The ladder of supervisory interventions.

In ‘Legal snippets’ read about pension fund rules and the Income Tax Act.

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

Regards

Tilman Friedrich

1. To be the number one address in day-to-day fund management,
2. To focus on superior client service and administration capability,
3. To be the best and not the biggest,
4. To be excellent through ownership,
5. To be committed to building the pensions industry in Namibia, etc.

Monthly Review of Portfolio Performance
to 31 July 2020

Assessing the impact of penalties and fines under the FIM Act
The new legal environment the Financial Institutions and Markets Act (FIMA) will bring about for non-banking financial institutions will have a serious impact on the costs that these institutions will have to incur to meet the new requirements of the FIMA, ultimately at the cost of the consumer of non-banking financial services.

‘Closer to home’, the FIMA will impact pension funds, all their service providers and ultimately the members of pension fund. By our count, pension funds, currently under the Pension Funds Act, need to comply with 29 legal and supervisory requirements. Pension fund administrators need not be registered at all and are therefore not subject to any direct compliance requirements.

The FIMA ushers in a new era. One of the key objectives of this statutory revoluti0n is to move from compliance or ‘tick-box’ based supervision to risk-based supervision. By our count under the FIMA, pension fund administrators now have to register, will be regulated and are subject to a separate law that was devised for pension fund and certain other administrators and forms part of the barrage of laws incorporated in the FIMA. Between pension funds and pension fund administrators, by our count there are now already over 600 compliance requirements, and this is not the end of it, as a number of standards still need to be issued by NAMFISA. Currently the highest penalty / fine that can be imposed between our courts and NAMFISA is an amount of N$ 1,000 per day for non-compliance with the investment prescriptions. All other fines and penalties under the current regime, are ‘paltry’ in relation to this fine.

Under the current regime the Pension Fund Act only once refers to imprisonment of a maximum of 12 months. Under the FIMA fines and penalties can be as high as N$ 10 million, and 10 years imprisonment, and such sanctions are multitude in each law of the FIMA.

It goes without saying that the massive increase in compliance requirements from 29 to over 600 together with the massive fines and penalties that can be meted out between our courts and NAMFISA will result in a painful increase in general cost levels in the non-banking financial services system in Namibia which will ultimately be borne by the consumer. It is inconceivable that no fund will ever be able to comply with over 600 requirements! Every single fund in Namibia will be found to be non-compliant in more than 1 area and it is a given that every fund will be sanctioned with penalties meted out by NAMFISA and with fines and even with imprisonment meted out by the courts.

Although it is at this stage very difficult to appreciate and quantify the cost impact of the new statutory and supervisory regime, preliminary indications are that the operational costs of an umbrella fund may easily increase by 50% or more between spending more on compliance by trustees and the fund’s service providers, on statutory reporting by service providers on behalf of the fund, on assurance by auditors and actuary, on communication with members and other stakeholders and on governance by trustees.

Evidently the cost of supervision by NAMFISA will increase in line with the increase in the operational costs that funds will experience.

As I pointed out in a previous edition, I am utterly amazed that a law the size of the FIM Bill and with such far reaching implications passed through parliament and national council with only a handful of grammatical corrections and this despite the relevant standing committee of parliament having been alerted to many serious concerns of the pension funds industry!

How do you benchmark the cost of fund administration?
 
Social Security Commission’s 2017 feasibility study on a National Pension Fund is providing some useful information to benchmark the cost of administration of pension funds, being based on research carried out in the southern African environment. The study deals with different components of which the ‘retirement component’ is in effect a defined contribution pension fund.

The report gives quite a detailed exposition of the costing to substantiate that SSC can do it cheaper than the private sector, due to the absence of a profit motive, and that it is feasible. It seems the authors of the study used figures from SA funds that indicate that one administrative staff should be able to handle 2,000 members. The number of members one staff member can handle of course significantly depends on the size of the fund and SA funds are on average much larger than Namibian funds. The larger the fund the more members one administrator can handle.

In the table below we have used the calculation in the study, adjusted for the 17% increase in the CPI index between June 2016 and June 2019, to arrive at the study’s implicit cost per member. This is for very basic services, no pensioners, no housing loans, no employer reporting, no separately audited financial statements, no NAMFISA reporting, no individual member choice etc. This calculation produces a cost of N$ 73.50 per member, per month. For commercial purposes a profit margin still has to be added. The typical profit margin for fund administrators is around 25%. This means that a very basic administration service, based on the average SA size of a free-standing fund would amount to around N$ 90 per member per month. For the significantly smaller average size Namibian fund this figure should be higher.

 
Should you now buy, sell or stay put?

‘Factset’ journal recently published some rather disturbing statistics on the S&P 500 share index as depicted in graph 1 below. It shows record high cuts to earnings per share estimates for the second quarter of 2020. The Q2 bottom-up EPS estimate (which is an aggregation of the median Q2 EPS estimates for all the companies in the index) declined by 37.0% (to $23.25 from $36.93) during this period. This is the largest decline since a 34.3% decline which occurred in quarter 4 of 2008, when the global financial crisis struck global economies. This is evidently the result of COVID-19 and the lockdown imposed on the US economy.

Graph 1

S&P 500 Change in Bottom Up EPS

What is further worrying is the fact that the S&P 500 index continued to increase despite the collapse in earnings estimates for this index as depicted in graph 2. Where the S&P 500 index represented about 68 times earnings per share estimates at the end of March, this multiple has now doubled to 136 times at the end of June.

Graph 2

S&P 500 Change in Q220 EPS vs change in price

In the July 2020 column in this newsletter, we pointed out that the 4 largest reserve banks globally have grown their balance sheets by 300% from US$ 6 trn to US$ 21 trn after the global financial crisis in 2007/ 2008 in order to prop up the economy and that between the Federal Reserve and the ECB alone, their balance sheets are set to increase by yet another roughly US$ 3 trn in response to the COVID-19 crisis this year. What these measures seem to have achieved is to prop up investor sentiment while they do not seem to have impacted company profits so far.

Although the market stress that was experienced in February and March has largely dissipated, it has not disappeared though, as the trajectory of COVID-19 and its economic consequences are still largely unknown. Volatility will persist and stresses will re-appear and will lead to market corrections.

In these circumstances, the investor is faced with three alternatives:

• He can cut his losses by selling out of the market
• He can take advantage of the depressed prices to buy into the market or
• He can stay put.

 
FIMA - the way forward
 
The FIM Bill was passed by Parliament on 7 July 2020. The Bill is expected to be published in the Government Gazette soon and thereby become law.

In terms of Section 468(1&2) of the FIM Bill, the Minister of Finance reserves the power to determine which provisions or Chapters will commence. As per a circular issued by NAMFISA in June 2020 setting out the NAMFISA FIM Bill implementation plan (‘Project New Dawn’), the implementation of the FIM Act may follow one of two routes:

1. The Minister of Finance may make all provisions for which the critical regulations and standards are ready and in place effective at promulgation date; or
2. The Minister of Finance may stay all provisions of the Act at promulgation date until such time NAMFISA advises the Minister on the ideal implementation date taking into account the underlying work that comes with formal consultations on the critical subordinate legislation.

 
Compliment from a pension fund consultant

Reinhard Voigt
Strategic Actuarial Partners Namibia (Pty) Ltd”

Fund administrators – a market overview

The following table provides an interesting overview of the retirement funds market in Namibia and RFS’ position in the market.



Important administrative circulars issued by RFS

RFS issued the following fund administration related circular to its clients over the last month. Should any client have missed this circular, please get in touch with your client manager:

• SMS Notifications (RFS 2020.08-12).
• FIM Bill Update (RFS 2020.08-13).

  
Pension funds industry meeting held 29 July

NAMFISA held a remote industry meeting on Wednesday 29 July. Here are a few notes on key matters discussed:

1. Chart of Accounts returns –
   • Investment income provided by some funds as year-to-date instead of for the reporting quarter only.
   • Fund reserves are included under ‘accumulated funds’ instead of including it under ‘reserves’.
   • Funds do not insert the “Balance at the beginning”, per previous Quarter’s Chart. Any differences to actual fund figures must be indicated under ‘prior period adjustments’.
   • All amounts should be determined on a cash basis rather than an accruals basis.
   • Unlisted investment requirements not observed in that committed capital is not drawn
   • Inconsistent classification of investments from quarter to quarter
   • Guidelines will be part of the Chart in future.
2. Annual financial statements and actuarial valuation reports
   • These documents are to be submitted via the ERS system in future. Provision has been made on the ERS menu as a specific ‘form’ to be selected.
3. Complaints
   • NAMIFSA is planning to meet quarterly with the 3 funds in respect of which the highest number of complaints were registered in order to find solutions with these funds for reducing the number of complaints.
4. Statistics and information extraction from ERS data base:
   • NAMFISA invites stakeholders to submit suggestions of useful information and statistics that it wants extracted.
5. Registration of rules and rule amendments (other than for new funds/ participating employers) –
   • the idea of restricting submissions to specified time blocks has been postponed.
6. New laws to be signed by President
   • Financial Institutions and Markets Act (FIMA)
   • Financial Services Adjudicator Act
   • NAMFISA Act’
7. Administration of Estates amendment
   • The amendment is being finalized by the Master of the High Court
   • No further consultation currently envisaged
8. Implementation of FIMA
   • Project plan for implementation was circulated to stakeholders by NAMFISA on 4 June
   • Regulations 12 and 13 issued under the Pension Funds Act will remain in force for the time being
   • Implementation plan lists all ‘critical’ standards (21) and regulations (8) that will be implemented immediately
   • NAMFISA will require 9 to 12 months to finalise these ‘critical’ standards and regulations
9. Fund rules deficient
   • Fund rules do not disclose to the members all costs associated with belonging to the fund
10. Total pension fund assets
    • Over the past 4 quarters to end quarter 1 of 2020, total assets grew from N$ 147 bn to N$ 172 bn at end quarter 4 of 2019, slumping by 10% to N$ 156 bn end quarter 1 of 2020
    • Regional allocation of assets at end of quarter 1 of 2020 –
      • Namibia – 41% (non-compliance with minimum of 45% persisted for past 4 quarters, likely due to GIPF’s non-compliance)
      • CMA – 21%
      • Africa ex CMA – 6%
      • International – 32%

• Stage 1 – no significant problems
• Stage 2 – early warning
• Stage 3 – risk to viability/ serious non-compliance or governance deficiency
• Stage 4 – future viability in serious doubt/ insolvency imminent
• Stage 5 – entity not viable/ solvent

Pension fund rules and the Income Tax Act

In this article we present a technical discussion between the editor and Andreen Moncur on the income tax law and Inland Revenue practice concerning fund rules and rule amendments and the implications of proceeding without having rules or rule amendments approved by Inland Revenue.

TF: Is it true that rule amendments need to be approved by Inland Revenue before one can implement them?
AM: It is preferable that rule amendments are approved by Inland Revenue before being implemented because while Revenue approval does not affect the validity of a rule amendment and one can operate a “retirement fund” (pension, provident, retirement annuity or preservation fund) without tax approval thereof, the complications of trying to reverse tax deductions etc if an amendment results in Inland Revenue no longer approving a retirement fund for tax purposes will be a nightmare. Please refer to ss 66 (‘additional tax in the event of default or omission’) and 69 (‘additional assessments’) of the ITA in this regard.    

TF: Inland Revenue approval of rules simply affect the tax treatment of a fund and its transactions. Proceeding without tax approved rules only holds in the risk that a fund may not enjoy the favourable tax treatment of a fund with tax approved rules.
AM: You are correct. Revenue approval simply affects the tax treatment of the fund and not the validity of an amendment. Inland Revenue approval is not required before an amendment can be implemented, but there is a risk to implementation of amendments before they are tax-approved.

TF: Also consider that rules “...shall be subject to approval by the Minister...in respect of the year of assessment in question...”. I would argue that it is Minister’s obligation to either re-approve rules every year for the tax year of assessment, or they are deemed to be tax approved unless the Minister has withdrawn his approval.
AM: Strictly speaking, the fund should apply for tax approval every year because the ITA talks about approval by the Minister for “any year of assessment” or “the year of assessment in question”. The onus is on the fund to prove that for any given year of assessment, the fund complies with all the necessary requirements for its approval. A trade usage or practice has arisen over the years in terms whereof the Minister (Inland Revenue), in a gesture of good faith regards a fund as approved without the fund having to “re-apply” for tax  approval annually once Inland Revenue has approved a fund as a “retirement fund” (see above). However, this continuing tax approval from tax year to tax year is premised on the rules of the fund remaining unchanged, and on the fund notifying Inland Revenue as soon as the rules have been amended (i.e. the rule amendment has been registered). As soon as there is an amendment to the rules, the fund’s tax approved status may well be in jeopardy; hence the requirement for all rule amendments to be submitted to Inland Revenue for approval in order for the fund to continue enjoying tax approval. The initial and the continuing tax approval of a fund is contingent upon, amongst others, the Minister being satisfied as to the provisions of the rules being in accordance with the ITA. The Minister cannot approve a fund if the rules do not comply with the ITA.

TF: As far as amendments are concerned the ITA only requires “that the Minister shall be notified of all amendments of the rules.”
AM: This is true, but  since the rules of the fund are subject to approval by the Minister to begin with, the purpose of notifying the Minister is to enable him to decide whether the amended rules still permit him to continue approving the fund for tax purposes, so the notification is more than just a courtesy by the fund. Notifying Inland Revenue actually enables Inland Revenue to do its job. As soon as rules are amended, the amended rules replace the approved rules and then one has to apply for approval of the fund from scratch as it were for the years of assessment affected by the amended rules.

TF: Since “...the Minister shall be notified of all amendments of the rules...”, the only rational conclusion I can draw is that the Minister cannot disapprove any rule amendment but would have to withdraw his approval of the rules for a specific tax year of assessment.
AM: Yes, you are correct. The Minister will not be able to refuse to approve a rule amendment, but will have to withdraw approval of the fund as from the year of assessment in which the rule amendment became effective (not as from the year in which it was adopted or registered because the rule amendment may be retrospective in its application). When Inland Revenue refers to rule amendments being approved in terms of the Income Tax Act, they really mean that the rule amendment in question has not resulted in the fund’s tax approval being withdrawn.

TF: Once rules have been approved by Inland Revenue, I would argue that they are valid for the year of assessment.
AM: The tax approval of rules can be withdrawn retrospective to the date on which the rules were amended such that Inland Revenue was no longer able to approve the fund for tax purposes. Inland Revenue has this power in much the same way that it has power to reopen previous assessments and levy more tax or disallow deductions previously allowed.

TF: Rule amendments can then probably only result in withdrawal of approval by the Minister for the next tax year of assessment.
AM: Not so, please refer to s 69 (‘additional assessments’) of the ITA. Please also refer to the anti-avoidance provisions in s 95 of the ITA.

TF: As you point out, the Minister has wide ranging powers that potentially create great uncertainty regarding the tax status of funds. Having followed the current practice of a once-off approval of rules, however, the Minister would have a serious problem withdrawing tax approval of a set of rules that he has approved before with back-dated effect, unless he can invoke some of the arguments referred to in ss 66, 69 and 95 and probably others too. We had such cases before where IR followed the route of requiring changes only prospectively.
     When it comes to rule amendments, we do not know to what extent we can accept that its approval means either the amended rules or just the amendment itself have been approved, particularly since the ITA has no provision that rule amendments must be approved. I would argue that the ‘approval’ we get upon submission of an amendment is meaningless as the result.
     I accept that in certain circumstances the ‘approval’ of a rule amendment by IR may just add a little bit of comfort and reassurance but it’s not a given. My concern is for us to withhold implementation of all rule amendments until they are tax approved, as a matter of principle. Whilst this may be ‘playing it safe’, as I pointed out, it may not necessarily be safe and it may even be unnecessary in many cases where the amendment clearly does not affect the definitions in the ITA or any other specific requirement.
AM: What you say is true, but I think there is merit in the "belt and braces" approach, even if only to show that the BoT attempted to comply with the ITA given Inland Revenue's broad powers. I still maintain that it is implicit in the relevant definitions in s 1 of the ITA that one must obtain approval of rule amendments. I do also believe that if a rule amendment has no bearing on the tax position of a fund, then Inland Revenue has no grounds to revoke approval even if the rule amendment is not submitted to them as required by the ITA.



Governments must beware the lure of free money

“It is sometimes said that governments wasted the global financial crisis of 2007-09 by failing to rethink economic policy after the dust settled. Nobody will say the same about the covid-19 pandemic. It has led to a desperate scramble to enact policies that only a few months ago were either unimaginable or heretical. A profound shift is now taking place in economics as a result, of the sort that happens only once in a generation. Much as in the 1970s when clubby Keynesianism gave way to Milton Friedman’s austere monetarism, and in the 1990s when central banks were given their independence, so the pandemic marks the start of a new era. Its overriding preoccupation will be exploiting the opportunities and containing the enormous risks that stem from a supersized level of state intervention in the economy and financial markets.

This new epoch has four defining features. The first is the jaw-dropping scale of today’s government borrowing, and the seemingly limitless potential for yet more. The IMF predicts that rich countries will borrow 17% of their combined GDP this year to fund $4.2trn in spending and tax cuts designed to keep the economy going. They are not done. In America Congress is debating another spending package (see article). The European Union has just agreed on a new stimulus funded by common borrowing, crossing a political Rubicon (see Leader).

The second feature is the whirring of the printing presses. In America, Britain, the euro zone and Japan central banks have created new reserves of money worth some $3.7trn in 2020. Much of this has been used to buy government debt, meaning that central banks are tacitly financing the stimulus. The result is that long-term interest rates stay low even while public-debt issuance soars.

The state’s growing role as capital-allocator-in-chief is the third aspect of the new age. To see off a credit crunch, the Federal Reserve, acting with the Treasury, has waded into financial markets, buying up the bonds of AT&T, Apple and even Coca-Cola, and lending directly to everyone from bond dealers to non-profit hospitals. Together the Fed and Treasury are now backstopping 11% of America’s entire stock of business debt. Across the rich world, governments and central banks are following suit.

The final feature is the most important: low inflation. The absence of upward pressure on prices means there is no immediate need to slow the growth of central-bank balance-sheets or to raise short-term interest rates from their floor around zero. Low inflation is therefore the fundamental reason not to worry about public debt, which, thanks to accommodative monetary policy, now costs so little to service that it looks like free money.

Don’t fool yourself that the role of the state will magically return to normal once the pandemic passes and unemployment falls...”

Download the full article in the Economist of 23 July 2020 here...

Portfolios need to be more active and flexible to ensure returns

“It is time to take a more active investment approach and be more flexible when constructing portfolios to ensure better returns, says international asset manager Schroders.

Its research has found that a balanced portfolio, traditionally investing 60% in equities and 40% in bonds, may not perform as well over the next 10 to 15 years as it did during the last decade.

These static 60/40 portfolios have delivered a strong performance in recent years as both equities and bonds have benefitted from favourable policy tailwinds. It has been an unusual period in history as correlations between these key asset classes have been negative. Bonds benefitted from falling interest rates to generate strong returns while, at the same time, equities have enjoyed the longest bull run in history,” says Michael Devereux, multi-asset fund manager at Schroders.

Challenges

However, he warns that there are serious challenges for such static portfolios going forward.

“Both equity and bond returns are likely to be lower in the future than during the past 10 years. Equities are facing economic headwinds and record valuations, while interest rates are at record lows and likely to remain low for years, affecting both the income and price appreciation potential for bonds.”

Schroders believes that investors should take a more active approach and consider a globally diversified portfolio of equities, fixed income and alternative assets....”

Read the full article on a new Schroder investment product for South Africans by Adriaan Kruger in Moneyweb of 17 August here...

• Setting boundaries with family, friends and work may sound harsh, but my experience has shown me that it's necessary.  Boundaries not only allow for greater productivity, but for better interpersonal relations as well.
• Have a definite off-switch for work life.  Give 100% while at work, but leave work at the 'office'.
• Take time out for yourself at home.  After work or when you're back from the school run, take 10 mins alone in your room to recharge your batteries.  Read, check your phone, but be on your own.  
• Take time out for yourself on weekends.  Be it running, walking, reading or shopping, do something for 'you'.  Your family will survive without you for an hour here or there.  Trust me.  Taking time out for yourself is so important to remain positive.
• Be present.  Give your full attention to your children and family when with them.  Make the most of the time you spend together.  Sometimes that is as simple as just communicating without distractions from your phone.

Great quotes have an incredible ability to put things in perspective.

"Women are like teabags, you never know how strong they are until they're in hot water."
~ Eleanor Roosevelt