Before we try to understand whether there is a case for retirement funds, we must first understand why this question has become more prominent over recent years.
Increased cost and administrative burden
Over the past five years, there have been numerous changes to the retirement fund sector framework that have affected members’ retirement savings. These changes or additional requirements have introduced the unintended consequences of increased member cost and reduced investment returns on retirement savings. Here is some of the recent and significant changes in the retirement fund sector framework that have directly impacted the cost of retirement savings:
The introduction of the one ‘Chart of Accounts’ reporting requirement in 2018 has cost retirement funds between N$10 000 and N$40 000, depending on the size and complexity of the fund.
The Financial Institutions and Markets Act, Act No 2 of 2021 (FIMA) present the following additional cost for retirement funds:
Appointment of consultants to implement and/or ensure compliance with FIMA;
Increased trustee remuneration to compensate them for the additional compliance requirements and penalties imposed by FIMA;
Increased Fidelity/Professional Indemnity cost to cover the significant penalties imposed by FIMA; and
More onerous administration and other service functions to meet FIMA requirements.
The increase in costs will have a direct, negative impact on members’ net retirement savings. Retirement fund savings will also be negatively impacted by the following sector changes:
Increase in the annual pension fund levy, imposed by NAMFISA, effective 1 November 2017. The levies changed from N$250 per fund plus N$12 per member to an annual levy of 0.008% of total fund assets;
Amendment of the Pension Funds Act (24 of 1956) Regulations, that increased the local asset allocation requirement for investments from 35% to 45% in 2018; and;
A proposal introducing a 15% Value-added Tax (VAT) on asset manager fees.
The above framework and sector changes have negatively affected the retirement savings, directly affecting the goal of adequately saving for retirement in the following manner:
A lower net contribution towards retirement savings. Your net contribution is your total monthly retirement saving (both employee and employer) less costs and fees. As the cost increase by legislative, framework, or sector changes, the net contribution reduces.
Lower real investment returns earned on retirement savings. The real investment return is your gross investment returns less investment cost and inflation. The impact of the above-mentioned changes are resulting in a lower likelihood of the growth of retirement savings exceeding inflation.
In Namibia, employers are not legally required to sponsor a retirement fund for their employees. As a result of increased costs and administrative burdens attached to retirement funds, more and more employers are assessing whether it is worthwhile to provide a retirement savings vehicle for their employees.
The benefits to investing
When assessing the current retirement savings environment and framework, we must appreciate that the Pension Funds Act, Act No 24 of 1956 (the PFA) and the Income Tax Act, Act No 24 of 1981 (the ITA) create extremely beneficial and secure conditions for an unparalleled savings vehicle. This stems from two unique legal frameworks applicable to retirement fund savings; namely, the special protection afforded to retirement savings by the PFA, and the tax incentives offered by the ITA.
Let us first consider the protection provided by the PFA. Section 37A of the PFA states that “…no benefit provided for in the rules of a registered fund (including an annuity purchased or to be purchased by the said fund from an insurer for a member), or right to such benefit, or right in respect of contributions made by or on behalf of a member, shall notwithstanding anything to the contrary contained in the rules of such a fund, be capable of being reduced, transferred or otherwise ceded, or of being pledged or hypothecated, or be liable to be attached or subjected to any form of execution under a judgment or order of a court of law….” This provision safeguards retirement fund benefits (payable to members as well as the beneficiaries of members who have passed away) from creditors.
Section 37C of the PFA requires that the Trustees determine how a retirement fund member’s death benefit will be allocated to his/her beneficiaries. In doing so, the Trustees ensure that all the member’s legal and factual dependants are considered for the allocation of the fund savings. This is not a requirement for other savings products that are not regulated by the PFA. This provision ensures that the most vulnerable members of society are afforded some protection when retirement fund death benefits are distributed.
The tax incentives available to the retirement savings sector are threefold. Firstly, employer contributions toward retirement savings are exempted, it being the generally accepted practice for decades and not law. These contributions are therefore not included in the employee’s gross income when calculating taxable income. Furthermore, up to N$40 000 of the employee’s contribution to a retirement fund is non-taxable. Secondly, the investment income earned on retirement savings is tax exempted. This is not so for other saving vehicles. Thirdly, upon the retirement or death of a retirement fund member, there is favourable tax treatment with respect to the benefit payments as only a portion of the benefit is taxable.
There are many other benefits to investing in a retirement fund that should not be forgotten, these include:
• The management and oversight of retirement savings are conducted by a Board of Trustees who are required to have the necessary skills, experience, and resources to ensure that sound decisions are made on behalf of the retirement fund members.
• When saving in a retirement fund, together with many other members, the economies of scale results in reduced costs versus when you save in your personal capacity.
• That retirement funds must appoint an independent auditor and a suitably qualified valuator who should ensure that the retirement fund assets and liabilities are recorded correctly and managed on a sound financial basis.
• Your investment for a comfortable retirement is safe in that you cannot ‘withdraw’ from the savings for luxuries, travels, or renovations ahead of retirement, which can easily be done in another savings vehicle.
Is there still a case?
Yes! Despite the challenges of increasing costs and the lower returns, there is still, indeed, a case to be made for retirement funds as the benefits still outweigh the challenges by far.
*Paul-Gordon /Guidao-ǂOab is the Chief Operating Officer, Corporate Segment Old Mutual Namibia.