NewsDay articles on pension matters generated significant public interest on how one can set about claiming what is truly their pension entitlement from their pension fund.
The first step in a process to claim one’s full entitlement is to have the correct entitlement on the table.
The entitlement from a pension fund could be one of any types including entitlement on your retirement, usually at an advanced age starting from the late fifties, entitlement on leaving employment, entitlement to beneficiaries on death of a pension fund member, among other entitlements.
Concentrating for the time being on retirement entitlements, one of the NewsDay articles referred to above explains that a retirement pension should be commensurate to the accumulation, at date of retirement, of all one’s contributions reduced by administration charges, at the purchasing power value on each previous date of contributing.
The actual pension to be paid out is an amount that can be withdrawn uniformly, from the contribution accumulation at retirement age, over one’s expected lifetime, taking into account a number of factors, key among them being the investment medium in which this accumulation will be placed.
The latter pension is actually that given by a defined contribution pension scheme type, the other main pension scheme type being a Defined Benefit pension scheme type.
The defined benefit scheme type will give you a pension that is a fraction of your earnings or salary at retirement age — this being laid down in the rules of your pension fund.
This fraction will depend directly on the number of years that one contributed to the defined benefit scheme and on the pension accrual rate specified by the scheme rules — the fraction is higher the longer one contributed.
All things equal, the defined benefit typically provides a higher pension than the defined contribution. At the very minimum, one should therefore expect a pension equal to the pension that they should get from a defined contribution scheme type.
A retirement pension entitlement illustration from a defined contribution scheme, as in the table above, can therefore tell you whether or not a pension entitlement from any scheme type is about right.
In order to calculate the US dollar pension entitlement from the defined contribution scheme, the US-dollar contribution accumulation should first be calculated from an accumulation of purchasing-power valued contributions made to the defined contribution scheme.
The expected life time of the incumbent can then be applied to the US-dollar accumulation at the retirement age to give the pension entitlement.
The scheme rules specify that contributions to be used in the accumulation calculation are to be deducted from the incumbent’s salary as a fixed percentage, say 4%.
The employer typically makes another contribution on behalf of this incumbent typically higher, on this same salary, say 6%. The pension fund administrator and/or insurance companies have a duty to maintain this contribution data and to avail it when required.
Rather than use a pension fund member’s actual contribution record, the illustration used the contribution amounts that should have been made by a male incumbent that started contributing to a defined contribution scheme on January 1 of each of the years shown, from the starting monthly salary shown, and worked continuously until 2009 when they were age 60.
The plausible assumption being made for this incumbent is that their salary increased with inflation and other adjustments until 2009, and that the Zim-dollar contribution made since 1986 always converted to a US dollar purchasing power value, at the day’s Zim-dollar/US dollar exchange rate, whenever the contribution was made.
It is further assumed that the administration charges on the contributions were 2,25% of contributions paid and that the net contributions in US dollar earned interest at 5%.
This interest rate is conservative given that interest rates in the US average about 3% and US-dollar investments in Zimbabwe earn more than 5% to internalise the risks involved. The accumulations would be higher if actual Zimbabwe US dollar investment rates are used. Insurance companies have actually been declaring interest rates much higher than this 5%.
It should be borne in mind that the pension fund member is entitled to a portion of the accumulated fund if they withdraw from the fund before retirement.
Finally the retiring pension fund member is assumed to live and earn the pension for about 15 years ie dying at age 75 years.
This life expectancy number takes into account that the pension will be paid from an investment medium that pays interest at 3%, no inflation incorporated.
This life expectancy number for a male life aged 60 is taken from a European survival model and makes a rough and ready adjustment to suit Zimbabwean life expectancy. It is also conservative given that life expectancy in Zimbabwe is currently very low. The pension entitlements above would be higher if the actual lower Zim life expectancy is used.
l Martin Tarusenga is a board member of Zimbabwe Pensions & Insurance Rights. Opinions expressed herein are those of the author and do not represent those of the organisations that the author represents.