Red flag over skyrocketing contribution arrears

PHILLIMON MHLANGA


Zimbabwe companies’ arrears to pension funds have risen to ZWL$675m in the three months to March from ZWL$621.7m in December 2019, attributable to the viability challenges faced by the sponsoring employers.


This is also a reflection of the general performance of the economy, which is expected to contract by more than 10% this year.


In December 2018, contribution arrears were ZWL$606.6m.


“The industry is faced with challenges that include contribution arrears
amounting to ZWL$675m as at March 30, 2020.

Trustees are pressured to recover (these) arrears,” Insurance and Pension Commission (IPEC) commissioner, Grace Muradzikwa said.


The surging arrears have threatened the viability of the pension sector.

Apart from that, non-remittance of pension contributions by companies has 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.


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 relates.


But, many employers 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that can be safely withdrawn during retirement.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

  1. 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.

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