Contribution arrears to pension funds have rocketed 43% to ZWL$887m in the six months to June, 2020 from ZWL$621.7m in January, due to viability challenges faced by the Zimbabwe companies.
In June 2019, companies contribution arrears stood at ZWL$655.01m, according to official data obtained from the Insurance and Pensions Commission (IPEC). In September 2019, the arrears declined 7% to ZWL$616.04m after one fund converted it’s contribution arrears into long-term debt.
But, the woes in the sector appers far from over as arrears shot up to ZWL$621.7 in December 2019, before surging to ZWL$675m in March this year. Now, the arrears have rocketed to close to ZWL$900m.
Pension contributions, however, soured to ZWL$1.2bn in June 2020 from ZWL$212m in June last year attributable largely to salary increases in response to to inflation, though not tracking the rate of annual inflation which stood at 737% in June. Asset base also went up to ZWL$66.41bn in June, from ZWL$29.81bn in June last year, representing a 843 jump.
The increase is above June annual inflation rate of 737%. The increase was due to re-evaluation of assets.
Apart from viabiliry challenges faced by pension funds, the failure by sponsoring companies to remit pension contributions has also deprived members and their families of their entitlements in the event of retirement, death or other developments.
These benefits can only be paid to beneficiaries whose contributions and premiums are up to date.
“We have witnessed contribution arrears rising to ZWL$887m. When we are in a hyperinflation environment like this, the issue of time value of money matters,” IPEC commissioner, Grace Muradzikwa said this week.
Analysts told Business Times this week that it is a criminal offence for companies to deduct pension contributions from employees’ salaries and wages but fail to remit them to their respective pension funds.
“According to the Pensions Regulations (Statutory Instrument 323 of 1991 and 61 of 2014), all sponsoring employers should remit contributions within 14 days after the end of each month to which the pension contribution relate,” Roseline Mabuwa told Business Times.
Despite the existence of such a law, many companies in Zimbabwe continue to deduct amounts from salaries or wages of their employees and deliberately fail to pay such amounts to the relevant retirement funds, choosing to fund their cash-flows instead.
Zimbabwe’s pensions sector has 1 067 registered funds.
A total of 26 pension funds, however, were undergoing dissolution in
2019 necessitated by financial challenges faced by the sponsoring employers, some of whom had closed down.
Four were finalised.
During the first half of this year, five additional pension funds were approved for dissolutions. Indications are that more inactive pension
funds will be applying for dissolutions.
They face high expense ratios.
Muradzikwa said internal guidelines were developed to help deal with troubled funds.
IPEC has sounded alarm bells on pension funds that have high expense ratios. This may eat into returns and can reduce the amount of money
that can be safely withdrawn during retirement.
IPEC is unhappy with the way the troubled sector is being managed as most
pension funds are running high operating expenses, with some exceeding income.
Internationally, an expense ratio of 8% or less is acceptable.
But, the average expense to contribution ratio for pension funds in Zimbabwe stood at 27.8% at the end of 4th quarter in 2019, while in the 3rd quarter, the sector reported a 23.31% expenses to contribution ratio. In the Q2 and Q1, it stood at 23.94% and 23.09% respectively.
IPEC is concerned about the unsustainable administrative expenses and has urged the pension funds trustees to reduce administration expenses to income ratio.
“Expense to contribution ratio has not improved as contributions have not
responded positively to inflation,” Muradzikwa said.
“IPEC has issued disclosure guidelines to curtail expenses and increase governance of pension funds. We urge (pension) funds to review
sustainability of their administration models.”
The high expense ratios are not sustainable in the long run as they may result in fund members losing value on their contributions over time.
However, average administration expenses to total income ratio improved on account of unrealised gains on listed equity and property investments.
At the end of December 2019, expenses to total income stood at 1.9% from 9.78% in Q1 of 2019.
Total expenditure for the year amounted to $599.45m, increasing in absolute terms from $409.64m reported for the year ended 31 December.
The relative increase was mainly a result of an increase in administrative expenditure from $82.65m on December 31 2018 to $188.96m for the year ended December 31 2019.