PHILLIMON MHLANGA
Zimbabwe’s pensions industry has been buffeted by erosion of pension investment values, unresolved loss of value issue and tumbling coverage in the wake of excessive expenses and high contribution arrears.
This also comes when the sector is experiencing weak corporate governance and hamstrung by outdated legislation.
The unrelenting shocks rocking the industry and the economy have resulted in increased product termination of policies as contributions, premiums and benefits can no longer keep pace with the rate of inflation, which is growing at astronomical rates that would not allow investment returns to keep pace.
Annual inflation in April jumped to 75,86 percent from 66,80 percent in March. The Inflationary environment erodes the real purchasing power resulting in policyholders terminating some policies after realising that no benefit would accrue to policyholders or the contract was unlikely to perform.
Zimbabwe Association of Pension Funds chairman Reginald Chihota told Business Times that the sector is in “serious problems”.
“It impacts on two ways,” Chihota said.
“The first one is on existing assets or the accumulated funds. If someone has been contributing for years and, until recently, that person thought he or she has US$50 000. But as of now, that money is in a different currency and has been seen seriously been eroded.”
The other impact is that pension funds invest in three classes of investments namely equities, money market and a significant portion in properties.
“The question is what is the value of that property now? Because of the exchange rate, values have been eroded and therefore what passes on to pensioners is also negatively impacted,” he said.
“The other issue is that of money contributions. People are saying we are losing money again like we did in 2009. For those who are contributing, inflation is now at 76% against returns of less than 7%. There are people who say they can pay contributions in United States dollars, but where can that be invested.”
Chihota said banks are offering very low interest rates of less than 1 percent and the transaction costs they charge are more than the returns on the money market. He added that equities and properties have also been hugely affected by the current economic conditions.
Policyholders are now calling for another Commission of Inquiry, the second in a decade, because the sector is losing pension values, real investment returns and benefits, in a manner reminiscent of value loss experienced on post the hyperinflation period.
There have also been increasing surrenders and lapses due to company closures or loss of jobs on the work of a worsening economic crisis. This has resulted in pension coverage in Zimbabwe of less than 20 percent, according to the insurance and pension’s regulator.
Excessive expenses have also been noted as one of the major problems causing loss of value. Expenses, post dollarisation have been averaging 81% of total premiums, according to official data obtained from the Insurance and Pensions Commission (IPEC).
Companies have also been failing to remit pension contributions to respective pension’s funds as a consequence of worsening economic conditions. This has resulted in contributions becoming more of a book entry because employers stopped submitting employees’ contributions.
Consequently, the pensions funds are now grappling with more than $600 million in arrears, a figure which IPEC said was an under estimate.
IPEC acting commissioner, Blessmore Kazengura said the operating environment was characterised by weak corporate governance practices, high contribution arrears, now amounting to more than $600 million, high administration expenses, outdated legislation and the unresolved loss of value issue.
“The pensions industry is losing value, the second time in a decade in a way reminiscent of the losses suffered in 2009,” Kazengura said.
“Also, the general RTGS dollars pricing model based on implied parallel exchange rate fuelled by speculative behaviour, continues to play havoc on the general stability of the economy and in particular on pension values.”
Zimbabwe Stock Exchange chief executive officer, Justin Bgoni, said high inflation and currency changes impacted negatively on pension funds.
“…the impact of currency changes is more pronounced on pension fund beneficiaries as prices are now pegged in US dollars. In May 2018, the parallel market rate was 1,5 RTGS/1USD and since then, the RTGS has tumbled to around 5,3 RTGS/1usd, a 72% depreciation,” Bgoni said.
Conversely it represents an annual inflation rate around 253 percent, which is higher than the official inflation rate.
He said it is “evident” that inflation erodes value for pension funds and their beneficiaries. The impact, he said, is worse on beneficiaries as their assets tend to be concentrated in money related instruments.
“Pension fund trustees need to up-skill investment decision making as traditional investment approaches may not work. It is also evident that some investment asset classes provide better inflation hedging qualities,” Bgoni said.
Anne-Marie D’Alton, chief executive officer of South African based Batseta said a number of pension funds fail because of ethical behaviour as performance and value creation consists of delivering high investments returns without irresponsible risk-taking and
managing expenses so that retirement saving may be maximised.
“What makes boards fail include inadequate skills, not understanding their role, poor decision making, poor risk management and misuse of assets,” D’Alton said.
Life Offices Association of Zimbabwe secretary general, Mavukeni Rufai said high inflation erodes the value of currency and renders it worthless significantly impacting on life and pension industry.
“The cost of service increases and company operations become less viable. This leads to employers failing to remit contributions, retrenchments and company closures. This contributes to rising unemployment and cost of living, policyholders with less disposable
income lapse or surrender their policies,” Rufai said.
He blamed the macro environment as a key determinant factor of loss of value which has led to the ripple effects and consequences.
In 2015, former President Robert Mugabe instituted an inquiry into the conversion of insurance and pension values from the Zimbabwe dollar to the United States dollar. The commission produced a report which was gazetted by government in March 2018.
According to the report, 43 percent of the loss of value suffered by policyholders and pension fund members was caused by micro-environment which is government, 21 percent was regulatory factors and 36 percent micro or industry players who caused erosion of value. This means the industry is liable for to a maximum of 36 percent of any loss in
value. The other contributory factors were beyond the control of the industry players.
“Companies are too frail to offer any form of compensation. Its gloom and doom as we are faced with the same situation as that of 2009 where values were eroded. Cash values in banks have lost value” Rufai said.
The pensions industry also has serious deficiencies with regards to proper record keeping. The situation has been exacerbated by the fact that the Insurance Act does provide guidance of record keeping issue.
Players who spoke to Business Times last week said keeping records for longer periods can become very costly.
