By Carmen Forster, General Manager, Old Mutual Short-Term Insurance
This is the fourth instalment in the series on ‘Understanding the Context of Pensions in Namibia in 2023’. Our first three articles covered Pillars 0 and 2 of the World Bank Pension Provision Model. In this article, we will focus on Pillar 1, which relates to contributory national social security retirement funds that seek to replace a portion of income and are usually sponsored by the state.
Legislative provision for Pillar 1
There is currently no Pillar 1 retirement savings vehicle in Namibia. The Social Security Act, No. 34 of 1994, (‘the Act’), however, provides for the establishment of the national pension fund (‘the NPF’). Key NPF provisions (as outlined in Section VII of Act) include the following:
- Contributions paid to as well as retirement, disability and death benefits paid by the NPF are prescribed;
- The provisions of the Pension Funds Act, No. 24 of 1956 (‘the PFA’) will not apply to the NPF;
- The NPF may grant home loans to its members in the same manner as outlined in Section 19 of the PFA; and
- Employees who are members of a pension or provident fund that was registered in terms of Section 4 of the PFA, may transfer their retirement benefits to the NPF if they are eligible to be a member of the NPF.
Latest developments with respect to Pillar 1
During the three decades since the Act was promulgated, the Social Security Commission (‘the SSC’) and the Ministry of Labour, Industrial Relations, and Employment Creation (‘the MLIREC’) have facilitated numerous NPF engagements with consultants and industry players. Various NPF models have been proposed and rejected over the years.
The most recent engagement took place in Windhoek from 11 to 13 July 2023 when representatives of the International Labour Organisation (‘the ILO’) assisted the MLIREC in hosting engagements with employer and employee representatives pertaining to two proposed NPF models.
Pillar 1 considerations
When determining the Pillar 1 structure that will be introduced in Namibia, there are several key issues that need to be considered.
Defined benefit vs defined contribution
One of the considerations is whether the NPF will be a defined benefit or a defined contribution fund.
The key features of a defined benefit fund are as follows:
- Benefits are calculated using a formula that is based on the member’s salary, age, and years of contribution to the fund;
- Benefits are guaranteed by the fund’s sponsor; and
- All members pay the same contribution to the fund, but the contributions paid by younger members are used to subsidise the benefits accruing to older members.
There are currently only two defined benefit funds in Namibia. One of these is the Government Institutions Pension Fund (‘the GIPF’).
The key features of defined contribution funds are as follows:
- Contributions made by the employer and employee are a fixed percentage of the employee’s salary;
- Benefits are not pre-defined or guaranteed but are equal to the accrued value of contributions (with interest and net of costs) that were paid to the fund on behalf of members; and
- The member bears the risk that benefits are lower than required due to worse than expected investment returns and post-retirement longevity.
The ILO does not support defined contribution national pension fund models as they do not comply with the requirements of the ILO Convention 102 – Social Security (Minimum Standards), 1952. The NPF model that the ILO endorses would be a compulsory, contributory, partially funded, defined benefit fund that offers benefits upon retirement, disability, and death.
Namibia has not ratified Convention 102 and therefore does not have to comply with its requirements. There is, however, an expectation from the ILO that we should comply since Article 95(d) of our Constitution requires that Namibia assumes “membership of the International Labour Organisation (ILO) and, (where possible seeks), adherence to and action in accordance with the International Conventions and Recommendations of the ILO“.
Contribution rates
The contribution rate paid by NPF members, and their employers is another consideration. The size of the contribution rate will depend on the targeted retirement benefit that the NPF is expected to achieve for its members as well as any pre-retirement benefits (e.g., death or disability benefits) that the NPF provides to its members.
The ILO endorsed NPF model would allow for a targeted pension of 40% of the member’s pre-retirement salary after 30 years of contributing to the NPF. The ILO would also want the NPF contribution rate to be cognisant of the anticipated ageing of the Namibian population.
Compulsory NPF contributions will have a financial impact on employers and employees who are either not currently contributing to an employer-sponsored retirement fund or are contributing at lower than the required NPF rate. Those who are contributing more than the required NPF rate will need to think about how to deal with the difference between the current contribution rate and that required by the NPF.
Exemptions
A decision will have to be made as to whether an employer sponsored occupational pension scheme may be used as a full or partial alternative to the NPF. If the NPF is a defined benefit fund, such exemptions are unlikely to be accommodated.
Another consideration will be whether to implement a salary floor and cap on contributions to and benefits accrued in the NPF.
Impact on existing retirement funds and ancillary benefits
Unless full exemptions are allowed for employer sponsored occupational schemes, the introduction of the NPF will have a significant impact on Pillar 2 retirement provision in Namibia. Most retirement funds are likely to terminate and those that continue to exist will shrink significantly in terms of membership and assets.
Some thought would need to be given to how to address:
- gaps between the risk benefits provided by existing retirement funds and those provided NPF members (both in terms of the value of the benefit and the period for which contributions must be made to the NPF before its members are able to qualify for death and disability benefits);
- home loans that have been distributed or guaranteed by employer sponsored retirement funds; and
- employees’ expectation that they will be able to access their accrued retirement savings when they leave their employer.
Other considerations
Some challenges that are likely to be experienced when implementing the NPF include ensuring compliance with the contribution requirements and including employees in the formal and informal sectors who are not currently participating in a retirement fund arrangement. It would be useful to learn from the experiences of other African countries, such as Kenya, Ghana, and Rwanda, who have either introduced Pillar 1 structures and/or proactively tried to accommodate the informal sector via Pillar 1, 2 or 3 structures.
We will continue to examine retirement fund reform in Namibia in our next article.
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