Is there a case for retirement funds?

Paul-Gordon /Guidao-?Oab
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 impacted 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 are 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) presents the following additional costs 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:



1. 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;

2. 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;

3. A proposal introducing a 15% value-added tax (VAT) on asset manager fees.



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 in a retirement fund?



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.



Caption: Old Mutual Namibia chief operating officer (COO), corporate segment, Paul-Gordon /Guidao-?Oab.