A win-win retirement arrangement

A retirement arrangement is a plan used to set aside money for retirement, and it is, in most cases, the only savings plan for retirement for many people. It is a benefit in the case of occupational retirement arrangements, which have an employer-employee relationship.

It is prudent and beneficial for an employer to establish a retirement arrangement for its employees, be it a stand-alone retirement fund or participation in an umbrella retirement fund.

Employer-sponsored schemes

It is imperative for an employer to establish a retirement fund for its employees. This will be part of the employee's benefits, referred to as a deferred salary or compensation. By so doing, the employer is assisting employees to plan for post-retirement. The employees contribute a certain percentage of their salary to a retirement fund; in addition, the employer also contributes a certain percentage on behalf of the employees, either to match the employee contributions or to contribute a higher percentage depending on the benefit design and affordability.

The employer can consider establishing a stand-alone retirement fund or participating in an umbrella fund. To determine which scheme is appropriate, the following factors are considered, but are not limited to: the size of the payroll, the number of employees, the benefit design, etc.

Small group

If an employer’s payroll is small with few employees and they wish to establish a stand-alone fund, the cost of managing the fund might be high and ultimately affect the net retirement savings, which would affect the retirement benefit.

The appropriate solution for an employer with a small payroll and few members is an umbrella fund. The benefit, amongst others, of joining an umbrella fund is the economies of scale that allow a greater allocation of net contributions towards members’ retirement savings.



Risks and considerations

The adverse is that, despite being afforded an opportunity to establish an advisory (management) committee, the participating employer has no control over the appointment of service providers or the top governance structure. Therefore, to make an informed decision whether to establish a stand-alone fund or join an umbrella fund, the employer will need to engage a retirement fund expert for advice; this will be different for each employer depending on the unique circumstances and needs. It is worth noting that retirement funds require good corporate governance, efficient operations, and sound investment strategies.

Furthermore, an employer would need to consider whether to establish a defined benefit (DB) fund or a defined contribution (DC) fund. The difference between the two is mainly determined by who bears the risk between the employer and the employee. In a DB scheme, the employer bears risks such as investment risks, longevity, and inflation. This will result in an open-ended liability arrangement for the employer, a risk any employer would have less or no appetite for at all. Whereas, in a DC scheme, the employee bears the above-mentioned risks, and in addition, there is a very high level of uncertainty about the level of income they can expect in retirement.

After an employer has considered whether they will be establishing a stand-alone retirement fund and whether it will be a DB or DC scheme, they will also need to consider whether it will be a pension fund or a provident fund.

Macro-economic benefits to the Namibian economy when an employer establishes a retirement fund:

1) It creates savings that can be used for essential investments in commerce and industry.

2) The investments made by the retirement fund industry lead to the employment of large numbers of people.

3) Many retirement funds often invest a part of their assets in social responsibility programmes, such as the provision of housing for members.

It is evident from the above that the establishment of a pension arrangement has benefits for the employer, the employees, commerce and industry, and the state.