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He then found it necessary to issue a 20-page addendum to his presentation, wherein he refuted and discredited each of the concerns we had raised, referring as ‘myths’, and referring to the ILO position as ‘reality’.
Some of the ‘realities’ contrasting our ‘myths’ are very insightful.
He claims that the cross-subsidisation between higher and lower income brackets is a minimal of 0.58% of the higher income brackets’ contribution. Unfortunately, he did not present numbers. How many contributors who currently participate in approved pension funds would contribute, and how many of those not covered by these funds would contribute?
We made the point that ILO labour statistics of 260 countries show that the average unemployment rate was 6%, contrasted with Namibia’s 33%, and the latter excludes 17% informally employed plus another 21% ‘vulnerably employed. The unemployed, informally employed and vulnerably employed are likely not covered by existing funds and would outnumber those in existing funds by 2.5 to one, contrasted with the global average of one unemployed to 17 employed. It already indicates that Namibia’s model cannot be anywhere similar to the ideal ILO model.
The expert suggests that its model must still find ways to cover these three categories of persons (own account workers, subsistence farmers and unpaid family workers). The higher income brackets and the government must each subsidise them. So the ILO does not yet know how to cover these groups, but in the meantime, we will set up an NPF for those already covered by the existing industry!
Furthermore, if the cross-subsidisation element is so immaterial, why are the ILO and the Ministry’s Labour Adviser so dead-set on obliging everyone to contribute to an NPF (National Pension Fund), which will uproot the existing industry and create a parallel national system? Most pension fund members would rather pay off another tax of 0.23% and look after their retirement capital than be forced into another inefficient, intransparent and inflexible government-controlled institution.
The problem with a defined benefit system is that it does not cater for a sudden currency collapse or hyperinflation, unlike defined contribution systems. Your benefits are a function of your salary, no matter what happens to the currency and inflation.
In a DC (defined contributions) fund, investment returns are linked to financial markets and a collapse of the currency or hyperinflation is typically compensated by high investment returns. Zimbabwe government employees who retired before the collapse of the Zim Dollar and the resulting hyperinflation were left destitute after it happened! I rather pay more towards management costs for the benefit of flexibility, transparency and control!
This brings me to another ‘myth’ that the existing industry will become economically unviable. The expert acknowledges the serious impact of the ILO model on the existing industry, but his ‘reality’ is that the NPF will accumulate significant assets that will need to be properly invested and that, at least at the beginning of the NPF, it will rely on outside expertise for the investment management by these asset managers.
Is this ‘reality’ a sign of a lack of insight into the Namibian pensions industry or a total disregard for all the other players in the industry? He states that in many countries with a DB social insurance scheme, there are also flourishing retirement funds industries. Does he understand our industry and its history?
Namibia would have had no social protection had it not been for the private sector’s introduction of private pension funds to which the pension industry caters. In the ‘many countries with flourishing industries’, I suspect that governments were first to introduce social protection or introduced it alongside the private sector introducing its own arrangements.
Many of these countries probably still offer economies of scale for service providers to private pension funds despite a national social protection fund. If our industry is left with only 60,000 members, it is hardly enough to allow one administrator (as an example) to run a viable operation, meaning there will be no competition with all the negative consequences of such a situation. The same will apply to many of the other specialised service providers!
Another ‘myth is that the SSC model envisaged a funding rate of 13% in contrast to the ILO model’s 15.9%. The expert points out that the latter rate would actually be very similar to the SSC’s rate if the ILO were using the SSC actuary’s assumptions. My question is, why does the ILO not use the same assumptions, or has it concluded that it has superior statistics?
Our argument that a market crash impacts DC and DB (defined benefits) funds in the same manner is a ‘myth’. According to the expert, the ‘reality’ is that it impacts 100% of the DC fund’s assets. Because the ILO model envisages only partial funding, such as 30% in Canada, where only 30% of the assets were impacted by the Global Financial Crisis.
The question is, who carries the difference between the value of the 100% liability and the 30% asset? The expert’s answer is that it is carried by its members collectively over a very long period without affecting the members’ pension.
So the ILO model cannot avoid the problem but merely transfers it to future generations, hoping that today’s assumptions will still be applicable in 100 years. After the Global Financial Crisis, US pension funds panicked about large actuarial deficits underwritten by the government. He makes the point that by smoothing investment returns in a DC fund, those retiring after a crash will be pleased, while those retiring after a bull run will not be. By implication, he says that because I can relate my benefit in a DC fund to developments in financial markets but have no insight and cannot do so in the ILO model, the latter is a superior arrangement.
He does not consider the smoothing in the ILO model as socialist but understands that it is based on ‘social solidarity and collective financing’. If a member of the NPF has no ownership despite being obliged to contribute, he has no interest in its success. It helps the government to monopolise another national asset at the expense of the private sector. To me, this is a socialist principle, but call it anything else!
The ILO expert declares a few other concerns as ‘myths’ with suspect arguments. Unfortunately, it serves little purpose to put forward meaningful arguments against the ILO’s NPF if the ILO and the Ministry’s labour adviser have their say.
The ILO experts stated categorically that it is about Namibia complying with the ILO Convention 102 (minimum standards). A DC scheme cannot be taken into account to assess compliance with ILO C.102. To sweeten what must be a bitter pill for Namibia adopting its model, the ILO offers its ‘Global Accelerator’ programme aimed at job creation. I am always very sceptical of someone wanting to sell something using a sales incentive. At the end of the day, the cost of a sales incentive is always built into the cost of the product.”
*Tilman Friedrich is a Chartered Accountant and a Namibian Certified Financial Planner® practitioner, specialising in the pensions field. He is co-founder, shareholder, and Chairman of the RFS Board and retired chairperson, and now a trustee of the Benchmark Retirement Fund.