Vul­ner­a­ble in­vestors? Namibia’s re­tire­ment fund mem­bers

Namibia’s re­tire­ment fund mem­bers

RISKAFRICA Magazine - - CONTENTS - Hanna Barry

The Fi­nan­cial In­sti­tu­tions and Mar­kets (FIM) Bill has re­ceived much cov­er­age in the Namib­ian press over the past year or so. A re­vised leg­isla­tive frame­work, the FIM Bill aims to en­hance pru­den­tial stan­dards in the fi­nan­cial ser­vices in­dus­try and ad­dress cer­tain weak­nesses in the cur­rent laws.

In a re­cent press re­lease, the Namibia Fi­nan­cial In­sti­tu­tions Su­per­vi­sory Au­thor­ity (NAMFISA) states that, “Through th­ese pru­den­tial stan­dards, NAMFISA aims to pro­mote pru­dent be­hav­iour by fi­nan­cial in­sti­tu­tions and en­sure that the risk they take is within rea­son­able bounds, clearly iden­ti­fied and well man­aged.”

The ques­tion that im­me­di­ately springs to mind is which fi­nan­cial in­sti­tu­tions and sec­tors re­quire the most sig­nif­i­cant en­hance­ment of their pru­den­tial stan­dards? Well, the re­tire­ment fund in­dus­try has come un­der fire re­cently, es­pe­cially the lack of pro­tec­tion that ex­ists for mem­bers of the sys­tem. The on­go­ing saga of one par­tic­u­lar re­tire­ment fund has been re­ported on in Namibia over the past few years and is just one ex­am­ple of po­ten­tial ill-pro­tec­tion. While the jury is still out on this spe­cific case, it none­the­less raises some dif­fi­cult ques­tions and danger­ous pos­si­bil­i­ties.

Are mem­bers pro­tected?

Cur­rently en­gaged in foren­sic in­ves­ti­ga­tions of the re­tire­ment fund in­dus­try, foren­sic in­ves­ti­ga­tors, ISG Risk Ser­vices, say that a sub­stan­tial lack of mem­ber pro­tec­tion ex­ists and will con­tinue to ex­ist when the FIM Bill is im­ple­mented. Ac­cord­ing to the com­pany, the laws that re­strict mem­bers’ ac­cess to in­for­ma­tion place them at sub­stan­tial risk of not be­ing able to look af­ter their own in­ter­ests. As it stands, mem­bers can ac­cess rules and fi­nan­cial state­ments only. Ad­di­tional in­for­ma­tion, such as fund per­for­mance data, is in­ac­ces­si­ble to mem­bers and im­proved ac­cess to in­for­ma­tion will not be en­trenched in the FIM Bill. A qual­i­fied lawyer, cer­ti­fied fi­nan­cial plan­ner and part­ner at ISG, Eben de Klerk, says that with­out this data, there is no way that mem­bers can know whether their ben­e­fit cal­cu­la­tions are cor­rect, there­fore en­sur­ing that their rights are prop­erly pro­tected. “In in­stances where ser­vice providers have made mis­takes, re­sult­ing in dam­ages to mem­bers, mem­bers are ex­cluded from the min­i­mum in­for­ma­tion re­quired to as­sess whether le­gal ac­tion is ap­pro­pri­ate,” notes De Klerk, re­fer­ring to a case in which it was found that the re­tire­ment ben­e­fits of fund mem­bers were in­cor­rectly cal­cu­lated.

In this in­stance, it ap­pears that there was an in­cor­rect cal­cu­la­tion of the ac­tu­ar­ial re­serve val­ues (ARV), which en­tailed the mis­taken ex­clu­sion of fund mem­bers’ 13th cheques, when the fund switched from a de­fined ben­e­fit to a de­fined con­tri­bu­tion fund in Jan­uary 2000. If proven, this er­ror has caused the fund to suf­fer dam­ages of an es­ti­mated N$50 mil­lion. The fund’s ad­min­is­tra­tor de­nies the al­le­ga­tions and af­ter con­duct­ing an in­de­pen­dent in­ves­ti­ga­tion, NAMFISA was sat­is­fied that no such mis­take oc­curred. How­ever, af­ter ad­di­tional in­for­ma­tion was pro­vided to the reg­u­la­tor, it has since un­der­taken to con­duct fur­ther in­ves­ti­ga­tions. “NAMFISA re­fused to pro­vide us with its ini­tial re­port, even af­ter we ap­proached the om­buds­man, who sub­se­quently re­quested the re­port from NAMFISA. What’s more, dur­ing the in­ves­ti­ga­tion, nei­ther NAMFISA nor the in­ves­ti­ga­tors made any at­tempt to ob­tain from ISG any of the source doc­u­ments or ex­pla­na­tions on which our cal­cu­la­tions and con­clu­sions are based,” ex­plains De Klerk. “This re­flects an ob­vi­ously one-sided ap­proach be­cause the in­ves­ti­ga­tors were pro­vided with in­for­ma­tion by the re­tire­ment fund or the fund ad­min­is­tra­tor only, with­out the com­plainants or their le­gal prac­ti­tion­ers, ISG, hav­ing any op­por­tu­nity to pro­vide ev­i­dence, in­put or ex­pla­na­tions as to how we ar­rived at the con­clu­sion that mem­bers’ ben­e­fit cal­cu­la­tions were wrong.”

De Klerk feels that in­stead of as­sist­ing mem­bers, NAMFISA has in many cases proven to be an ad­di­tional ob­sta­cle to mem­ber pro­tec­tion. And he doesn’t fore­see this chang­ing un­der the pro­posed FIM Bill. “The cur­rent sec­tion 30 (pro­posed sec­tion 49) of the NAMFISA Act has in the past been in­ter­preted by NAMFISA as stip­u­lat­ing that it can pro­vide no in­for­ma­tion to a mem­ber of a fund, other than the rules and fi­nan­cial state­ments. This is also based on a mis­in­ter­pre­ta­tion of sec­tion five of the In­spec­tion of Fi­nan­cial In­sti­tu­tions Act 38 of 1984,” he notes. Sec­tion five states that af­ter com­plet­ing their in­spec­tion, an in­spec­tor shall sub­mit a re­port to the reg­is­trar, who will then sub­mit a copy to the fi­nan­cial in­sti­tu­tion con­cerned. “NAMFISA in­ter­prets this as mean­ing that they are pro­hib­ited from pro­vid­ing a copy to the con­sumer. This is true even in cases where mem­bers have com­plained and the in­for­ma­tion in ques­tion was ob­tained by the reg­u­la­tor as a re­sult. NAMFISA is aware that mem­bers are un­able to make ben­e­fit cal­cu­la­tions if not pro­vided with their mem­ber data. Re­fus­ing such in­for­ma­tion dis­ables mem­bers to look af­ter their own in­ter­ests and en­force their own rights, es­pe­cially when the re­port is given to the ex­act same trus­tees who could be in­fring­ing on th­ese rights. In the case of one re­tire­ment fund, the

mem­bers are not privy to NAMFISA’s re­port, which was com­mis­sioned on the ba­sis of their com­plaints. We don’t even know what the scope was of what was in­ves­ti­gated, which is why we are now tak­ing the in­ves­ti­gated par­ties to court.”

Pres­sure from the reg­u­la­tor led the fund in this mat­ter to even­tu­ally pro­vide the NAMFISA re­port to ISG. How­ever, it con­tains none of the data or in­for­ma­tion upon which the re­port’s find­ings are based. And De Klerk says that judg­ing from the re­port, the scope of NAMFISA’s in­ves­ti­ga­tion was not well-man­aged and suf­fi­ciently fo­cused. For in­stance, the con­ver­sion val­ues that would in­di­cate whether a ben­e­fit mis­cal­cu­la­tion was in fact made are not in­cluded. This in­for­ma­tion has been re­fused to ISG and NAMFISA from day one. “De­spite this be­ing a crim­i­nal of­fense, NAMFISA is not tak­ing any steps to ad­dress this and didn’t re­ply to a let­ter we sent them on the mat­ter in June last year,” says De Klerk. It is not known or un­der­stood why the trus­tees would refuse even the reg­u­la­tor the con­ver­sion val­ues.

ISG is cur­rently act­ing on be­half of 160 mem­bers of this fund, who are tak­ing the risk upon them­selves in tak­ing this mat­ter to court, as they will be li­able for any charges if ISG does not win the case. The de­fen­dants have raised nu­mer­ous in­ter­locu­tory ap­pli­ca­tions and their strat­egy is clear. “NAMFISA does not un­der­stand the vac­uum they cre­ate for con­sumers in this reg­u­la­tory regime. It sim­ply does not get in­volved, de­spite hav­ing mas­sive in­ves­tiga­tive pow­ers,” re­marks De Klerk. “Our con­cerns are around ac­cess to in­for­ma­tion. Most peo­ple have no fi­nan­cial means to en­force their con­sti­tu­tional rights should they want to ac­cess in­for­ma­tion in the hands of the in­sti­tu­tions cre­ated for that pur­pose, one of th­ese be­ing NAMFISA.” If it in­sists on with­hold­ing in­for­ma­tion for rea­sons of the pro­tec­tion of per­sonal in­for­ma­tion or in­tel­lec­tual prop­erty rights, De Klerk says that it must then be ac­count­able for er­rors. How­ever, he adds that in terms of the pro­posed leg­is­la­tion, it can­not be. “New reg­u­la­tory laws re­main fu­tile if mem­bers are re­fused ac­cess to in­for­ma­tion by funds, ser­vice providers and NAMFISA alike, while a blind eye is turned to pos­si­ble mis­deal­ing by the reg­u­lated funds and ad­min­is­tra­tors. If it in­sists on claim­ing that it has no lo­cus standi in a mat­ter, as is of­ten the case, then it must be es­tab­lished who does in fact have lo­cus standi and is able to re­solve mat­ters on be­half of con­sumers.”

He adds that an­other ma­jor prob­lem is in­stances in which a fund ad­min­is­tra­tor acts as both ad­min­is­tra­tor or ac­tu­ary and con­sul­tant to the fund’s trus­tees. This ex­hibits a clear con­flict of in­ter­est and could lead to smeared in­for­ma­tion be­ing pro­vided to the trus­tees. ISG has tried in vain to hold a meet­ing with the trus­tees of one par­tic­u­lar fund to dis­cuss its find­ings and ex­plain the im­por­tance of re­ceiv­ing the orig­i­nal fig­ures and in­for­ma­tion from the ser­vice provider that was re­spon­si­ble for the fund at the time of con­ver­sion. In fact, one of the rea­sons it asked NAMFISA to in­ves­ti­gate was be­cause af­ter ap­proach­ing the trus­tees of the fund with its con­cerns and find­ings, they did noth­ing mean­ing­ful to pro­tect their mem­bers.

This raises fur­ther un­com­fort­able ques­tions about the role of trus­tees and ser­vice providers, and not only the reg­u­la­tor, in our re­tire­ment fund in­dus­try. De Klerk is not the only per­son in­volved in the sec­tor who is con­cerned about the pro­tec­tion af­forded fund mem­bers. Til­man Friedrich, man­ag­ing di­rec­tor of Re­tire­ment Fund So­lu­tions (RFS), a lead­ing Namib­ian pen­sion fund ad­min­is­tra­tor, says that re­tire­ment fund mem­bers may be worse off to­day than they were be­fore the switch from de­fined ben­e­fits to de­fined con­tri­bu­tions.

Com­pro­mised ad­vice

Be­fore the switch from de­fined ben­e­fit to de­fined con­tri­bu­tion funds, funds were not re­quired to be au­dited or pre­pare an­nual fi­nan­cial state­ments and were not man­aged by a board of trus­tees. “Those were the good old days for in­sur­ers, who had the mar­ket wrapped up and could do what­ever they wanted with­out fear of be­ing ques­tioned. Namibia’s im­pend­ing in­de­pen­dence pro­vided a con­vinc­ing ar­gu­ment to ad­vis­ers to have the in­sur­ers’ shack­les bro­ken,” says Friedrich.

At in­de­pen­dence, most funds were liq­ui­dated and mem­bers could ei­ther take their money or trans­fer it into one of the new funds. Th­ese were es­tab­lished as de­fined con­tri­bu­tion funds, with boards of trus­tees placed in charge of the

busi­ness of their fund. “Funds had to pre­pare au­dited an­nual fi­nan­cial state­ments and were free to choose all of their ser­vice providers. The risk of poor in­vest­ment re­turns was trans­ferred from the spon­sor­ing em­ployer to the mem­ber,” con­tin­ues Friedrich. He is scep­ti­cal of whether the newly ap­pointed boards of trus­tees were ca­pa­ble of man­ag­ing the af­fairs of their fund, both then and now. In fact, since many of them are so bur­dened by run­ning their own busi­nesses, he thinks that ad­vis­ers have qui­etly taken con­trol of th­ese funds. “Ad­vis­ers have since done a great job of con­tin­u­ously de­vel­op­ing and in­vent­ing new prod­ucts and ser­vices, in an at­tempt to broaden their prod­uct of­fer­ing and build their busi­ness,” he re­marks. This has cre­ated an en­vi­ron­ment prone to con­flicts of in­ter­est and du­bi­ous prac­tices, fun­da­men­tally ques­tion­ing the in­tegrity of the in­dus­try.

“What com­pli­cates mat­ters is that even the reg­u­la­tor has to get to grips with the tech­ni­cal­i­ties of many of th­ese prod­ucts and ser­vices and the hid­den in­ter­ests of their spon­sors,” he con­tin­ues. “The reg­u­la­tor needs to crit­i­cally as­sess whether prac­tices are in the best in­ter­ests of mem­bers, but re­acts by im­pos­ing in­creas­ingly oner­ous re­quire­ments on the in­dus­try, ac­cel­er­at­ing a move to­wards um­brella funds.” This does not solve the is­sue around the con­trol that prod­uct providers main­tain over funds, which of­ten leads to un­nec­es­sar­ily com­plex ar­range­ments in pen­sion funds, akin to re­tail ar­range­ments. Th­ese ar­range­ments do not have enough of a pos­i­tive im­pact on mem­bers’ re­turns to jus­tify the in­cum­bent costs. “I sus­pect that mem­bers to­day in many in­stances are sig­nif­i­cantly worse off in terms of ben­e­fits re­ceived for ev­ery Dol­lar in­vested in the sys­tem, as the re­sult of the self-in­ter­est of their ad­vis­ers,” con­cludes Friedrich.

Om­buds­man the so­lu­tion?

The com­plaints ad­ju­di­ca­tor has been re­moved from the FIM Bill and re­named the Fi­nan­cial Ser­vices Om­buds­man. Ac­cord­ing to a state­ment from NAMFISA, “The func­tions of the com­plaints ad­ju­di­ca­tor, as an ad­ju­di­ca­tor for con­sumer com­plaints from reg­u­lated fi­nan­cial in­sti­tu­tions, may be ex­panded to in­clude com­plaints from non-reg­u­lated fi­nan­cial in­sti­tu­tions (other paras­tatals pro­vid­ing fi­nan­cial ser­vices). The de­vel­op­ment of the le­gal frame­work for the com­plaints ad­ju­di­ca­tor, now re­named the Fi­nan­cial Ser­vices Om­buds­man, will be co-lead with the Bank of Namibia.” Based on this state­ment it seems that the om­buds­man could pro­vide greater reg­u­la­tory rigour. How­ever, the in­dus­try has not yet seen the Fi­nan­cial Ser­vices Om­buds­man Bill. A lack of con­sumer pro­tec­tion is a con­cern in any so­ci­ety. And it does seem that we have some way to go to en­sur­ing that our re­tire­ment fund mem­bers en­joy the pro­tec­tion that must ac­com­pany af­fairs as se­ri­ous as th­ese. While some of the is­sues raised in this ar­ti­cle have been posed to NAMFISA, it was un­able to re­spond be­fore our print dead­line. We hope to bring you a re­sponse from the reg­u­la­tor in an up­com­ing is­sue.

In in­stances where ser­vice providers have made mis­takes, re­sult­ing in dam­ages to mem­bers, mem­bers are ex­cluded from the min­i­mum in­for­ma­tion re­quired to as­sess whether le­gal ac­tion is ap­pro­pri­ate.

New reg­u­la­tory laws re­main fu­tile if mem­bers are re­fused ac­cess to in­for­ma­tion by funds, ser­vice providers and NAMFISA alike, while a blind eye is turned to pos­si­ble mis­deal­ing by the reg­u­lated funds

and ad­min­is­tra­tors.

The reg­u­la­tor needs to crit­i­cally as­sess whether prac­tices are in the best in­ter­ests of mem­bers.

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