Red flag over pension funds’ high expense ratios


The Insurance and Pensions Commission (IPEC) has sounded alarm bells on pension funds that have high expense ratios warning this may eat into returns and can reduce the amount of money that can be safely withdrawn during retirement.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 pension funds in the country are being managed after it emerged that most of them are running up high operating expenses, with some exceeding income.

IPEC said the impact of high expense ratios was critically important as this can add up to significant amounts.

Some pension funds have expense ratios of over 20 percent. Internationally, an expense ratio of eight percent or less is the acceptable standard.

“The total expenditure for the industry amounted to $157,65 million for the six months ended June 30, 2018,” IPEC said in a latest report on the pension’s subsector.

“The expenses were mainly driven by pension benefits totaling $119,03 million, accounting for 75,50 percent of total expenditure.

“The industry also reported total administration expenses amounting to $38,62 million for the period under review. The administration expenses translated to average expense ratios of 19,09 percent and 11,23 percent based on total contributions and total income respectively,” it said.

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.

“The stand-alone pension funds reported $20,14 million in administrative expenses, translating to administrative expenses to contributions and total income ratios of 22,50 percent and 12,22 percent respectively. On average, staff costs amounting to $5,37 million accounted for 26,68 percent of total administrative costs.

“The Commission is concerned about the unsustainable administrative expenses and encourages trustees to consider necessary cost containment measures. The Commission has drafted a raft of proposals to curb the high expense ratios and other problems plaguing the industry,” it said.

According to official IPEC data, the insurance and pension sector regulator, controls about 1 047 pension funds in the country as at the end of June, a decrease from 1 304 recorded in March, and has now warned that pension contributors could find themselves with very little or nothing when they retire because the high expense ratios would deplete pensions.

But, an even bigger problem is that management and administrative fees, and operating costs were “bleeding most pension funds at the expense of the fund members”.

The pension industry is plagued by persistent problems such as failure to remit pension contributions by companies despite deductions from employees.

Zimbabwe’s pension funds are struggling to collect contributions from the country’s troubled corporate sector with figures from IPEC showing that more than $630 million was in arrears as at end of June this year.

The figure might have shot up by now as the liquidity crisis rattling businesses took a turn for the worst in the last few months, resulting in more employers failing to remit their pension contributions.

“Yes concerns are growing over high expense ratios but I think it’s because the economic situation is getting worse,” Elisha Ngunga, the Construction industry pension fund’s chief executive officer told Business Times at the Construction Industry Federation of Zimbabwe annual congress held in the resort town of Victoria Falls last week.

“I think it’s important that even though the operating environment is tough, we should make sure that the pension fund is getting value for members. This means running a low cost fund which result in better value for members.”

An executive with the Mining Industry Pension Fund admitted that the fund was experiencing high expense ratio.

“We are experiencing high expense ratio, but, we are hopeful that the economic conditions will improve in the new Republic and we will be able to contain our costs,” an executive who requested not to be named told Business Times this week.


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