Pension funds: A looming crisis?

The pension industry assets were concentrated in investment properties and quoted equities, which constituted a combined position of 69 percent of the industry’s total assets portfolio.
. . . A snapshot of the Zim pension industry

The Zimbabwean pension industry, once a beacon of financial security for millions, is facing a storm of challenges.

A 2024 second quarter report by the Insurance and Pension Commission (IPEC) has painted a stark picture of the industry’s financial health, raising concerns about the future of pension benefits for millions of members.

As of June 30, 2024, the total industry assets for fund business stood at a paltry US$2,18 billion.

This figure, though a 37.11 percent increase from the previous year, is largely due to revaluation gains and exchange rate fluctuations rather than substantive growth in underlying assets.

With a membership of approximately 968 337, this translates to a per-member asset value of a mere US$2,251. In other words, if the funds were to be liquidated today, each member would receive a fraction of their expected retirement benefits.

The industry’s investment portfolio is heavily concentrated in investment properties and quoted equities, accounting for a combined 69 percent of total assets.

While this strategy may have yielded significant returns in the past, it has also exposed the industry to market volatility and economic shocks.

The equities market has had its nominal gains significantly eroded by currency depreciation while the investment properties have been affected by significant vacant spaces.

Meanwhile, the industry’s total income for the first half of 2024 declined by 49.45 percent compared to the same period in 2023.

The total income for the period under review was US$1,39 billion (ZWG18,72 billion), representing a 49.48 percent decline from the US$2,75 billion reported in the same period the previous year.

This decline can be attributed to various factors, including economic instability, inflationary pressures, and the impact of the Covid-19 pandemic.

At the same time, administrative and benefit payment costs have continued to rise, further eroding the industry’s financial position.

Of the total income, US$101,9 million was in foreign currency, making up 7.33 percent of the industry’s total income.

The major source of income was fair value gains on investments, constituting 79 percent of total income, amounting to US$1.1 billion (ZWG14,83 billion). However, the realised income was US$292,08 million (ZWG 3,94 billion) which was 21.05 percent of the total income.

Foreign currency-denominated assets increased by 38.97 percent from US$287,81 million as at Q2 2023 to US$399,98 million as at Q2 2024, thus commanding 18.38 percent of total assets.

The industry’s reliance on foreign currency-denominated assets has been a double-edged sword. While it has helped to protect portfolios from domestic inflation, it has also exposed the industry to the risks of foreign exchange shortages and volatility.

The recent increase in foreign currency-denominated assets has been driven by investments in the Victoria Falls Stock Exchange (VFEX), which offers exposure to foreign securities.

IPEC said pension funds should ensure that the income generated by foreign currency denominated assets is equitably allocated to members to improve member benefits and accumulations.

However, the sustainability of this trend will depend on the availability of foreign currency and the overall economic environment.

To address the challenges facing the pension industry, the IPEC has called on pension funds to take several measures, including expanding investment portfolios to include a wider range of asset classes, such as infrastructure and private equity.

It might also include implementing robust risk management frameworks to mitigate the impact of market volatility and economic shocks.

The regulator also advised sector players to enhance corporate governance practices to ensure transparency, accountability, and prudent investment decisions.

There is also need to take steps to recover outstanding contributions from employers, IPEC said.

The regulator said by taking these steps, the pension industry can work towards safeguarding the retirement savings of millions of Zimbabweans.

However, the ultimate success of these efforts will depend on the stability of the economy and the implementation of sound economic policies.-bsinesswekl