Retirement Fund Solutions, Managing Director, Marthinuz Fabianus comments on the current debate of compulsory preservation of pensions.
Observer Money (OM): What is your opinion on this topic?
Marthinuz Fabianus (MF): The biggest majority of employees only save for retirement through the contractual employer sponsored pension funds. Membership of an employer’s pension fund is a condition of service. Caring employers with good fringe benefits tend to have low staff turnover and employees as a result build up large sums in their retirement savings accounts. When an employee with 15 to 20 or more years of service change jobs, it becomes tempting to cash in on the funds accumulated over the years. Some employees may even resign just to access the funds to solve short term financial needs. The Income Tax law offers tax advantages to employees who decide to preserve their retirement savings at the time of changing jobs. Any amount not taken in cash, but transferred to another approved pension fund is then not taxed at all. Another approved pension fund can be your new employer’s pension fund, a preservation pension fund or a retirement annuity fund. So, voluntary preservation is a good thing, but very few exercise this option. Only financially mature and financially disciplined people do that. It is also common that the older you get, the more likely you will be worried about preserving your funds saved for retirement. Younger people will feel that they can always start over when joining a new employer and will usually cash in on their savings to meet immediate and short term needs. Since the younger generation nowadays change jobs more often than the older generation, it also means they do not build up enough savings for later use when retired. They will then become a burden on the state. I will thus support compulsory preservation for this reason, but I am first to agree that some discretion must still be left to the individual. Some life events also need to be considered if preservation pension fund savings is forced on pension fund members by law.
OM: What are some of research and outcomes that you have done on this topic?
MF: There are various pension fund surveys done over the years by institutions like Old Mutual, Sanlam and PricewaterhouseCoopers, that offer some insight on preservation statistics, but mostly on South African pension funds. In Namibia the situation is more or less the same, as we in any event share the same pension fund law. I can informally confirm that the large majority of employees’ cash in and do not preserve their pension fund savings when changing jobs. It is mostly true for younger people and to a lesser extent the older people get.
OM: What are some of the vital statistics regarding person preservation in Namibia?
MF: Based on our experience and involvement with employer pension fund arrangements of more than 150 different employers across all sectors and industries of our economy, more than 90 percent of people cash in on their pension fund savings when changing jobs. The Income Tax law currently allows Preservation Funds to pay out amounts invested provided it is withdrawn in the first three years, should a member wish to access their funds invested in a preservation fund. Most people that preserve any amounts when changing jobs, invariably cash out the remaining amounts before the expiry of the three years.
OM: How many Namibians are saving for retirement?
Based on the NAMFISA annual report for the year ended March 2023, active members of pension funds in Namibia total 334 362. Most of these members are spread across 69 active pension funds which include the GIPF (around 104 000 members). The second biggest number of the members about 80 000 are mostly in large umbrella pension funds offered by insurance companies and pension fund administrators. Lastly some members about 50 000 are in exclusive pension funds of large employer groups, referred to as stand-alone or private pension funds, whilst you also find members about 40 000 in retirement annuity funds without the involvement of an employer. The balance are actually pensioner members (with GIPF pensioners over 40 000) and members of dormant funds.
OM: Why is this topic hot and controversial at the moment?
MF: The Financial Institutions and Markets Act (FIMA) is the new law for governing all non-banking financial institutions which are supervised by NAMFISA. The different institutions used to have their own laws, such as the Pension Funds Act, Long Term Insurance Act and the Short Term Insurance Act. Chapter 5 of FIMA replaces the Pension Funds Act. The Minister of Finance issued a draft Regulation (RF.R. 5. 10) to require compulsory preservation of at least 75 percent of all pension fund savings whenever a member terminates membership of an employer’s pension fund. This was obviously not well received by members of pension funds and by the general public. The matter received attention of activists who created awareness and rallied the public against such a regulation being enforced. As we speak, the Minister of Finance halted the implementation of the whole of FIMA and appointed a Technical Advisory Committee (TAC) to carry out public consultations regarding this specific draft Regulation of FIMA. When a privately managed umbrella pension fund (Benchmark Retirement Fund) amended its rules to allow payment of funds inherited by a minor to be paid the minor’s estate in the event of the minor’s death, a popular activist put it on social media as being a FIMA inspired rule change. This was rather unfortunate in an environment where most people don’t really understand the workings of pension funds and public perception was formed that Benchmark and FIMA are bed fellows.
OM: Anything else to add?
The Ministry of Finance’s TAC is currently carrying out town hall meetings across the country to obtain public opinion on compulsory preservation. It is good that public is given an opportunity to voice their opinions, though the expected response is obvious. In truth, FIMA contains various other Regulations (at least seven including the one in question) and Standards (23 standards) issued by Ministry of Finance and NAMFISA respectively that make the management of pension funds a lot more challenging and very costly. The Regulations and Standards were never considered and tabled in Parliament when the FIM Bill was passed by Parliament. Ideally, FIMA must be referred back to Parliament to allow Regulations and Standards to be reviewed by Parliament given the public outcry.
