This is the fourth instalment in the series “Understanding the Context of Pensions in Namibia in 2023.” The preceding three articles discussed Pillars 0 and 2 of the World Bank Pension Provision Model. In this article, our focus shifts to Pillar 1, which pertains to contributory national social security retirement funds typically sponsored by the state.
**Legislative Provision for Pillar 1**
Namibia currently lacks a Pillar 1 retirement savings vehicle. However, the Social Security Act, No. 34 of 1994, hereinafter referred to as ‘the Act,’ does provide for the establishment of the national pension fund (‘the NPF’). Key provisions related to the NPF, as outlined in Section VII of the Act, include:
– Specified contributions and prescribed retirement, disability, and death benefits.
– Exemption from the provisions of the Pension Funds Act, No. 24 of 1956 (‘the PFA’).
– The NPF’s authority to grant home loans to its members, following Section 19 of the PFA.
– Provisions allowing employees who are members of a pension or provident fund registered under Section 4 of the PFA to transfer their retirement benefits to the NPF if they meet NPF eligibility criteria.
**Latest Developments Regarding Pillar 1**
Over the past three decades since the Act’s enactment, the Social Security Commission (‘the SSC’) and the Ministry of Labour, Industrial Relations, and Employment Creation (‘the MLIREC’) have organized several NPF consultations with consultants and industry stakeholders. Various NPF models have been proposed and rejected during this time.
The most recent engagement occurred in Windhoek from July 11 to 13, 2023, with the International Labour Organisation (‘ILO’) assisting the MLIREC in conducting discussions involving employer and employee representatives regarding two proposed NPF models.
**Considerations for Pillar 1**
Several critical factors must be taken into account when determining the structure of Pillar 1 in Namibia:
1. **Defined Benefit vs. Defined Contribution**: One consideration is whether the NPF will adopt a defined benefit or defined contribution approach.
– Defined Benefit Fund: Benefits calculated based on a formula incorporating members’ salary, age, and years of contributions, guaranteed by the fund’s sponsor. All members contribute the same amount, with younger members subsidizing older members.
– Defined Contribution Fund: Contributions, fixed percentages of an employee’s salary, do not predefine benefits but equal the accrued value of contributions (with interest, net of costs) to the fund. Members bear the risk of lower-than-expected returns and post-retirement longevity.
The ILO does not support defined contribution national pension fund models, as they do not align with the requirements of the ILO Convention 102 – Social Security (Minimum Standards), 1952. The ILO-endorsed NPF model would be a compulsory, contributory, partially funded, defined benefit fund providing benefits upon retirement, disability, and death.
Namibia, although not a signatory to Convention 102, is expected to comply due to Article 95(d) of its Constitution.
2. **Contribution Rates**: Determining the contribution rates for NPF members and their employers is crucial and should align with the targeted retirement benefits and pre-retirement benefits (e.g., death or disability benefits) offered by the NPF.
3. **Exemptions**: A decision must be made on whether employer-sponsored occupational pension schemes can serve as full or partial alternatives to the NPF.
4. **Impact on Existing Retirement Funds and Ancillary Benefits**: Introducing the NPF will significantly affect the Pillar 2 retirement provision in Namibia. Existing retirement funds may terminate or shrink, necessitating strategies to address various issues, including gaps in benefits, home loans, and expectations of accessing accrued savings upon leaving employment.
5. **Other Considerations**: Challenges related to compliance, inclusion of employees in the formal and informal sectors, and drawing lessons from the experiences of other African countries like Kenya, Ghana, and Rwanda in implementing Pillar 1 structures or accommodating the informal sector should also be considered.
In our next article, we will continue to explore retirement fund reform in Namibia.