Vulnerable investors? Namibia’s retirement fund members
Namibia’s retirement fund members
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.
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
The regulator needs to critically assess whether practices are in the best interests of members.