Construction industry questions the regulatory risk and impact of FIMA’s pension fund section
A majority of the members of the Construction Industries Federation of Namibia (CIF) expressed their concern about the Pension Fund section in the Financial Institutions and Markets Act. The act was supposed to become operational on 01 October 2022 but on 11 July the guiding agency, the Namibia Financial Institutions Supervisory Authority (NAMFISA) announced that the date has been postponed.
In the meantime, the Federation polled its members specifically on the provisions of the Pension Fund section, to get an idea if construction companies will be able to comply with the new act.
CIF General Manager, Bärbel Kirchner, said the Federation’s members are most concerned about the principle of compulsory preservation, and the risk of penalties and fines, which may have a detrimental effect on their cashflows.
“One of the extensively discussed implications of FIMA is that 75% of a pension fund member’s capital must be preserved until retirement, once FIMA becomes effective,” she said.
“Another issue is that all funds would have to register again with NAMFISA with extensive new and additional administrative requirements for funds to ensure compliance with the new act and the recently published standards and regulations. It may well be that some of the smaller funds might not have the resources to meet and cannot afford these requirements,” she said.
“Another change is that the penalties for failures or offenses are much more severe, which can have implications for the employer, his directors and senior executives, as contributor to the fund.”
“For that reason we felt that it remains important and relevant, especially since employers in the construction sector are mandated to enroll workers in the construction sector in a pension fund. That does not include all employees but certainly those that are part of the categories as listed in the gazetted Collective Agreement for our sector.”
As there is currently an umbrella pension fund for the workers in the construction sector, the Namibian Building Workers Pension Fund (NBWPF), CIF employer members were asked whether or not they had their workers registered with the NBWPF. Only 18% of the respondents had their employees registered with the NBWPF. Other pension funds being used are the Orion Pension Fund, the Benchmark Retirement Fund and Momentum.
“63% of the respondents said that their employees are not in support of the new legislation which requires the preservation of 75% of the benefits until after retirement. Currently, many employees in construction only have contract employment and would often struggle to ensure continuity of employment. For that reason they needed access to funds accumulated in their pension fund in order to have financial resources when not employed,” stated the Federation.
Another serious concern is the extremely steep escalation in penalties and fines for non-compliance. The survey revealed that members are concerned about paying pension fund contributions on time and the impact of missing the deadline. A substantial number felt that the penalties, interest and fines are unreasonable, not taking into account of the reality of cashflow in construction companies.
It was pointed out that FIMA expects full compliance but in the meantime, construction companies are left in the lurch by the government who does not pay on time, or pay at all for construction work that has been completed.
It was suggested that the non-payment of contributions should result in far less harsher penalties, for example fines of only one per cent of the total contribution. These harsh penalties could also result in retrenchments, especially if there are no financial resources available for the employer contribution.
90% of responding employers said that the penalties were too steep. Some even considered it an abuse of power. Some felt that the proposed penalties would discourage employers to register their employees with a pension fund as the risks was too high. The implications are that one transgression – e.g. a technical glitch – could lead to financial hardship due to the penalties imposed.
No pension fund instead of ruinous penalties
Businesses that were experiencing financial distress, would be better off not to provide the benefits of employer contribution to pension funds. Mandatory pension fund contributions – such as in the construction sector and proposed penalties for late payments, would mean that some employers would employ the absolute minimum or even close their businesses. Some fear that the magnitude of proposed penalties when businesses are already facing financial difficulties, could mean that businesses cease to exists with the consequences of ever lesser current and future financial security for employees.
Under FIMA, a trustee or a principal officer can be charged with a criminal offense, despite many offenses being a result of unintended administrative failure. Fines and administrative penalties can vary from N$500,000 or 12 months imprisonment up to N$10 million or ten years imprisonment. All responding employers felt that the fines and penalties were too high, to the extent that one felt that all principal officers and trustees should be advised to resign. The penalties were also considered to be out of proportion when compared with other offenses, and indeed criminal offenses. However, some felt that the proposed penalties should be applied to repetitive offenders.
With regard to proposed level of fines and penalties, it would be likely that trustees would no longer be volunteered, due to the risk involved. The further implication is that the expertise required to administrate a pension fund will become prohibitively expensive due to the severe regulatory risk.
“Some existing pension funds are too small to fulfill the requirements of NAMFISA, if one were to take into consideration their current asset base and the level of membership. The costs of compliance requirements would essentially undermine the benefits that members can receive. That may lead to the development of “umbrella funds”, where the management of smaller funds will be absorbed by a larger fund. When asked about whether they would be in favour of this development despite that funds might loose their individual characteristics originally defined and based on the needs of their members, 72 % of responding employers mentioned that they were unsure about the developments of umbrella funds, 18% were against it and 9% were in support of the development of umbrella funds,” stated the Federation.
Employers in the construction sector – as a result of the gazetted Collective Agreement for the construction industry – are legally required to register their workers with a pension / retirement fund. Excessive penalties therefore can have a huge implication for employers in the construction sector.