Why do we have a regulation 13 in Namibia, formerly known as regulation 28 (or regulation 15, its equivalent for insurance companies) that sets certain caps for how much a fund may invest in certain assets classes, in foreign markets and in certain specific script? Well the purpose of this regulation, that has evolved over many years of trial and error, is to protect pension funds, but importantly and ultimately their members, against potential loss resulting from having taken excessive risk. It has unquestionably been serving a good purpose for many years, in that it has limited losses to members to a significant extent – thinking about Steinhoff et al!
Opportunistically, in growing numbers, product providers are circumventing the purpose of these regulations. This development is exacerbated by the fact that in the insurance industry, the investment caps are applied at company rather than at fund level while for retirement funds they are applied at fund level. Generally, most retirement funds and more so insurance companies, are far off the caps set by the investment regulations, as the result of maintaining reserves and members investing in low risk portfolios. As the result, some retirement funds and insurance companies use this ‘slack’ in their investment structure to allow individual members to invest up to 100% of their capital in equity, offshore, in a specific asset such as gold, in a specific company, such as Steinhoff, etc. Since neither the retirement fund nor the insurance company stand in for any losses that a member may incur as the result of having taken risks that the investment regulations intended to avoid, the member will have to carry any loss, certainly in the first instance.
Unfortunately, prevailing economic and market conditions offering poor investment returns to pensioners and fund members, encourage and promote this development.
I will caution retirement funds, insurance companies and the brokers that have pounced on this loop-hole. If I was the member that incurred a loss as the result of having circumvented the caps set by the investment regulations, I would in the first instance sue the broker as the ‘weakest link’ in this chain. I do not believe the argument that the member was fully informed about the risk etc will be sufficient to get the broker, the retirement fund or insurance company off the hook, as all of them will have been aware of the purpose of the investment regulations and the risks of circumventing these for individual members.
In this context it is relevant to point out that in SA this loop-hole was closed in that the investment regulations must be applied at member level on a ‘see-through’ basis. I understand though, that living annuities are not subject to the investment regulations in South Africa, which is not the case in Namibia.