IPEC reviews guarantee fund operating framework
THE Insurance and Pension Commission (IPEC) is reviewing the operations of guaranteed funds after identifying several loopholes regarding the administration of the investment product.
Guaranteed funds are a type of investment product offered by insurance companies that allow clients to invest in equity, bond, or index funds while providing that a predefined minimum value of the fund (usually, the initial investment amount) will be available at the fund’s maturity or when the client dies.
The guarantee is that all or part of the invested capital will be secure for a specific date in the future. In some cases, there is the possibility of almost guaranteed returns.
IPEC, which supervises the operations of insurance firms and pension funds, said among the challenges identified regarding the operations of these investment products was the lack of transparency to investors in terms of their operations, particularly the performance of underlying assets investee companies.
It also identified the unfettered discretion of management and the board of insurers in determining bonuses and returns to the policyholders. In its current form, the guaranteed fund makes it difficult for funds to comply with the requirement to appoint an independent board.
There is also lack of control by investors, particularly the pension schemes’ boards, in making critical decisions to do with investment and declaration of bonuses.
In addition, the cost of the guarantee is higher than the benefits accruing to the policyholders, particularly when fees are charged on both vested and non-vested portions.
While investors are guaranteed net contributions and vested portions, the insurers are levying the cost of guarantee on the total assets (vested and non-vested). Furthermore, policyholders exiting the guaranteed fund in an inflationary environment are leaving value as they get monetary benefits, which are not a reflection of the assets backing their liabilities. IPEC also noted that guaranteed funds were offering nominal guarantees in a hyperinflationary environment.
“Having identified the above challenges, the commission is inviting all stakeholders to come up with proposed solutions to each of the identified challenges relating to the structure and operations of guaranteed funds,” said IPEC acting commissioner of insurance and provident funds Mr Robson Mtangadura in a letter to various stakeholders including pension funds and insurance firms.
“The commission will consider all the input from the relevant stakeholders and industry players to arrive at an informed decision.” He said the consultations were part of a broader assessment the commission was currently carrying out on the continued relevance of both insurance and pension products in the market in a bid to ensure that products are tailored to the needs of policyholders and investors.
Mr Mtangadura said the commission had for some time been assessing the operations of the guaranteed funds and had identified the need to review its operations.
-herald
