Pension industry grapple with low confidence

The pension industry continues to grapple with low confidence levels after hyperinflation severely eroded retirement savings in 2008, the Zimbabwe Association of Pension Funds said in its March 2023 Newsletter.

Pension fund values were badly eroded in value due to devastating hyperinflation, which soared to a record 500 billion percent in 2008 according to the International Monetary Fund.

The government wiped out the hyperinflation figures in 2009 when it abandoned the use of the Zimbabwe dollar for a basket of foreign currencies, but mostly dominated by the U.S. dollar, leading to what was generally called dollarisation.

The commission of inquiry, chaired by retired Justice Smith, confirmed a “huge” loss of value to policyholders and pensioners and recommended compensation for the loss suffered.

It established that while pensioners and policyholders lost value during the conversion period, they also lost value throughout the investigation period between 1996 and 2014.

Some of them got zero values owing to a lack of benefit inflation-indexation and currency de-basing. The loss of value has left many people, after years of hard work, poor and have been expecting compensation.

In a thread posted on April 17, 2023 on his Twitter handle, economic analyst Brains Muchemwa, who was part of the commission of inquiry, said “pension contributions in Zimbabwe continue to suffer loss of value due to perennially high inflation and extortionate expense ratios”.

Muchemwa said the National Social Security Authority and other pension funds are only solvent because they are not indexing the value of contributions to benefits.

“Once they do that,they all become insolvent. Today’s surplus is based on nominal values.”

Market watchers say the loss of value has eroded confidence in the sector.

“The success of pension products in Zimbabwe is going to require some significant effort, especially considering that the workers lost faith in the system when pensions lost their value in 2008/2009 hyperinflation,” the Zimbabwe Association of Pension Funds said.

Some analysts say uncertainties over the stability of the local currency were also a factor contributing to low confidence levels.

“It will be very difficult to regain trust after the hyperinflation eroded pension value around 2008,” Harare-based economist Carlos Tadya said.

“Then we still have currency issues; there is no guarantee that the currency will remain stable given the previous experiences. That also affects confidence and pension funds need to come up with products that encourage retirement savings.”

Muchemwa suggested that pension funds be allowed to invest in gold.

“Gold should be a prescribed asset of not less than 60 percent for pension funds and insurance companies. We need to create a vibrant market for gold locally.

“It makes more sense for pension funds to buy gold at LME+ 10 percent than to keep the contributions in local currency on the money or property market. A dollar in pension contributed today is worth less than a cent in 10yrs. The insurance equation of value is extensively violated.

“That’s why our pensioners are in a mess. The same goes for NSSA which has the DNA of losing value for the pensioners. Gold will no doubt preserve the value of contributions,” tweeted Muchemwa.-ebusinessweekly