UK-based Zimbabwean lawyer and expert on corporate governance Alex Magaisa has urged Zimbabwean workers to file a collective lawsuit against pension funds to recover pre-dollarisation contributions, dismissing as lame claims by fund managers that the annuities were eroded by hyperinflation.
The last recorded official annual inflation rate peaked at 231 000 000% in July 2008.
Pensions are an annuity set up to smooth out consumption over the life of a career by transferring income from the period of active employment to retirement, a process managed by an investment company known as a pension fund, which pools individual contributions into a portfolio of managed investments.
However, post-dollarisation balances and payouts reflect an inverse welfare system, the transfer of value and purchasing power from contributors to the managing trusts.
Describing the pension loss as a corporate fraud, Magaisa pointed out that pension and mutual funds invested the bulk of the pension income in properties and equities to hedge schemes under management against inflation.
The assets, he said, are still reflected in their various balance sheet positions of the fund managers.
The Kent University lecturer also argued that professionals engaged to manage the annuities possess the requisite technical aptitude and capability to preserve and create value for the benefit of policy-holders.
He said employees had a right to demand an explanation on how pension funds managed the life savings and to know the actuarial method they used to convert the policies and schemes to the United States dollar when the country dollarised in February last year.
“I think there are strong grounds to litigate,” Magaisa said. “It shows there is no culture of litigation in Zimbabwe because that would not have happened in the UK and other developed countries. But there’s still potential for private action.”
Pension funds converted schemes to United States dollars in February last year, the month Zimbabwe’s switched to multiple currencies.
But the actuarial valuation stripped the schemes of the value of years of contribution and forced contributors into a technical start-up mode.
“It’s true the conversion of pensions from Zimbabwe dollars to United States dollars is controversial,” Theodora Moyo, Alexander Forbes Risk Services Zimbabwe managing director, said.
“There are many questions about the accuracy of the conversions. Life and pension companies have shot themselves in the foot because this has undermined confidence in pensions.”
Some analysts have asserted that Zimbabwe’s pension “scam” is thinly variant with the US Bernard Madoff scandal, which prejudiced investors of their life savings in more or less the same way.
Old Mutual Zimbabwe Limited, Zimbabwe’s largest pension fund, however claims the actuarial conversions were done professionally, free of error or manipulation.
“The valuations were professionally done, nobody lost value,” Old Mutual Life Assurance managing director Jonas Mushosho said.
“People did not lose value because of the conversion. The fact is that the actual assets had lost value. Insurance and pensions companies were required to invest in prescribed assets, government bonds, and we all know what happened to government bonds. The Reserve Bank of Zimbabwe was also raising money through prescribed assets.”
But Magaisa and other analysts don’t believe this is an honest explanation and suspect foul play.
Firstly, pension funds’ exposure to inflation through prescribed assets was only 35%, meaning they could preserve 65% of the value of contributions, invest and still yield good returns on the investments.
Secondly, it is hard to believe that as hyperinflation savaged the economy, pensions funds deliberately didn’t think of seeking sanctuary in properties and other asset-based portfolio positions to preserve value.
Assuming they did, there was no way a portfolio mix dominated or leveraged by properties could have lost value to inflation, even when described as “record high” or prefixed by hyper.
Assuming they didn’t, then the industry cannot be trusted with employee savings anymore, and must be denied a chance to perform another ruinous act henceforth.
Either way, pension and mutual funds have an obligation to compensate contributors for fraud in the first case and for negligence in the second, both of which are unscrupulous acts.
Asked to explain why Old Mutual Zimbabwe was stock-piling properties while contributors were retiring into poverty, CEO Luke Ngwerume said the assets belonged to policy-holders.
“Those properties don’t belong to us. Old Mutual merely earns a fee, it’s what we get after the investing in the infrastructure. Our role as a pension fund is to create value for our policy holders.
“The fees we get are on average 0,5%. We cannot raise the fees beyond this because they will affect the returns and the capacity to reinvest the income. Besides, if the product becomes too expensive for the customer; you risk losing your customer.”
The explanation, however, appears conceptually inconsistent.
On one hand the properties don’t belong to pension funds, and on the other they don’t belong to the policy-holders, which raises the question: who then owns the properties and who gets the value?