Can pension funds regain public trust?

‘Fool me once, shame on you; fool me twice, shame on me,’ so goes a popular proverb.
It is encouraged for people to learn from their mistakes and past experiences.

Pension funds are operating in an environment of mistrust from the public, largely due to the many factors that have negatively affected the country’s economy over the past two decades.

Around 2008-2009, Zimbabwe experienced hyperinflation, which eroded the value of most savings, including pension savings.

But what is the cost of mistrust in Zimbabwe’s pensions sector, given the sector’s role in securing the financial status of retirees and the significance of its contribution to the broader economy?

One figure could be telling: by the end of 2022, 313 occupational pension funds were under dissolution.
Old Mutual Life Assurance Company general manager, Ms Lindah Mariwande, said Zimbabweans need to look beyond previous value loss experiences if they are going to make solid financial decisions for the long term.

“Savings are important for a country. So, when we vote with our purses and say I will not put it in there (pensions), do not complain when you do not have roads, do not complain when you do not have infrastructure, and do not complain when industries are floundering.

“We need to re-orient and ask ourselves for how long we are going to be angry; for how long we are going to have this mistrust.

“We need to question some of the decisions that we are making from the pain that we have experienced,” Ms Mariwande said during the 48th Zimbabwe Association of Pension Funds (ZAPF) annual congress.

Notwithstanding the general lack of confidence in the long-term sustainability of capital values and returns, the local pensions sector still faces several challenges.

The sector is struggling with contribution arrears, relating to issues such as sponsoring employers facing viability challenges, and an increase in informal employment.

The problem of contribution arrears has also been worsened by employers that have increased non-pensionable allowances.

Low pension accumulations are also a result of partial withdrawals on job switching.
With most pension funds heavily invested in property assets, some of these investments have been affected by rent defaults by sitting tenants (both commercial and residential).

Property investments accounted for 44 percent of the pensions industry’s total investment portfolio in 2022, up from 30 percent in 2021.

Real estate investments also tend to lock in capital in the near term, which has reduced pension funds’ liquidity.

Given the above, and in addition to information asymmetry, pension funds are also faced with the challenge of high expectations from their members.

Perhaps because of the 2009 value loss to savings and/or structural issues at the industry level, Zimbabwe has a modest value of retirement savings relative to the size of the economy.

With the Zimbabwe National Statistics Agency (ZimStat) estimating the country’s gross domestic product (GDP) at around US$28 billion in 2021, pension funds’ assets accounted for just 6 percent of that GDP figure at the end of 2022.

According to data from the Insurance and Pensions Commission (IPEC), the pensions industry assets stood at US$1,65 billion as of December 2022, down from US$2,94 billion the prior year.

According to the United Nations University World Institute for Development Economics Research, the proportion of assets in retirement savings to GDP for South Africa is over 90 percent; Namibia has over 70 percent of total assets in retirement savings to GDP, and Botswana is at over 42 percent.

This shows that the industry has a huge scope for expansion.
But it needs to get a mistrusting public onside.
Pensions industry practitioner and Comarton Consultants managing director, Mr Richard Muirimi, said pension funds should invest in assets that generate regular income in foreign currency.

“We must pick up those assets that we know are US dollar-focused in their facing and the actual regular income that they generate.

“Another investment that we should consider is farming, which can create annuity income of export proceeds for a minimum period of 20 years,” he said.

The Government promulgated Statutory Instrument 280 of 2020 allowing for new pension and insurance business to be underwritten using foreign currency. In terms of this legal instrument, pension funds are required to settle obligations in the currency in which the premiums have been received.

Local pension funds are also now allowed to hold foreign investments equivalent to 15 percent of their total assets.

Mr Muivimi also said more pension funds should start paying US dollar pensions.
IPEC director of pensions, Mr Cuthbert Munjoma, said 11 pension funds paid benefits in foreign currency amounting to US$462 477 in the first quarter of this year.

However, the pension funds constitute only 2 percent of the active pension funds.
According to IPEC, of the 981 registered occupational pension funds as at the end of 2022, 504 were active. Rebuilding trust will also require that yesteryear’s problems are effectively addressed. The Justice Smith Commission of Inquiry, appointed in 2015 to probe the conversion process that resulted in the 2009 value loss, noted that demonetisation of the local currency and poor regulatory enforcement were largely to blame. In 2022, IPEC issued 32 circulars aimed at strengthening the regulation of the pensions sector. This also comes as the Pension and Provident Funds Act (Chapter 24:32) was promulgated last September.

Legal practitioner, Mr Nobert Phiri, says the new pensions law addresses some gaps highlighted in the Justice Smith Commission of Inquiry report.

“The Act carries through provisions enhancing consumer rights,” he says.
“It incorporates universally accepted principles for adequate financial consumer protection to ensure protection of the rights and benefits of fund members and their beneficiaries.”

However, the existence of a law can only achieve so much, pension funds should comply with basic expectations of their model.

For instance, the regulator has raised concerns over pension fund expenditures that are outweighing pensioners’ benefits.
-herald