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Minimising prejudice of pensioners

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Pension fund membership and insurance policyholders have actively begun seeking the true entitlements arising from their pension funds and insurance policies.

In a clear show of vote-of-no-confidence for pension and insurance funds management, the author has been inundated with enquiries from pension fund membership and insurance policyholders about how they can calculate their true entitlements.

Most of these enquiries are motivated by unconvincing, typically incorrect entitlement responses from pension fund and insurance company management.

The responses in question include apportionment of blame, inflation, the government and ministers changing pension and insurance laws, undiplomatic “take-it-or-leave-it” declarations and outrageously illegal excuses pertaining to the unavailability of data.

When referenced against best practices, none of these responses can stand both the legal and professional rigour required of insurance company and pension fund management.

The shallowness of the responses further reveals firstly a very poor insurance business foresight, considering the dependency of insurance and pensions services on continued public trust and secondly, a conceptually rigid pension and insurance management with no capacity to fathom out effective correct pension and insurance solutions when faced with unusual situations, situations which this world unfortunately keep presenting.

Based on the trust that any insurance and pension transaction is premised, a pension and insurance system is, in every respect, as good as its word to its clients.

In his 2003 corporate governance remarks after the collapse of Enron and WorldCom, former US Federal Reserve Bank governor Alan Greenspan, reminds the business communities that:

“Reputation and trust were particularly valued assets in freewheeling nineteenth-century” American business. Vigorous competition for the reputation that their “word was their bond”, saw the development of the financial services sector, banking, insurance and pensions sectors included.
Opportunist and crooks have existed in the financial services sector, as in every business. In recognition of the need to uphold this trust, in the face of the threat from the latter minority group, legislation, regulations and supervision frameworks have evolved to support the upholding of this much needed trust.

When appropriately formulated and implemented, insurance/pensions regulations provide appropriate incentives, to managers and regulators to protect consumers and to sustain the macroeconomically important pension and insurance system, in Zimbabwe such a process can help meaningfully reform the current pensions/insurance system.

Regulators such as Insurance and Pension Commission of Zimbabwe, as the privileged collectors of information about insurance companies they oversee, have for instance incentives to use this information to favour one interest group over another by concealing (or selectively availing) that information, and/or have incentives to attempt to divert funds towards activities that yield private benefits extracted from the regulated entity itself.

They could for instance prolong failed company receiverships and inflate costs thereby accruing private benefits for themselves at the expense of various stakeholders.

Insurance company management of privately owned insurance companies, on the other hand, have incentives to expose the insurance firm’s assets, in particular pensioner and policyholder funds, to high risk for their benefit in the full knowledge that they are protected by limited liability terms of stock-held (private) companies.

Motivated by the need to remove the mis-alignment of the incentives of insurance/pensions regulators and their management, to the objectives of pensioners and insurance policyholders, some governments have moved to introduce preventive insurance/pensions regulatory frameworks.

Regular enforced disclosure of the levels of money (or reserves) that insurance companies and pension funds should maintain, now form part of insurance/pension regulations.

These reserves should explicitly be proportional to the pension and insurance policy obligations they have contracted with the public, so called risk-based capital regimes.

Such regulations explicitly list the risks that should be reserved for and the methods for so reserving for the obligations.

The reserves can only be maintained in prescribed permissible credit-worthy investment mediums.

This is in line with the three mutually reinforcing pillar systems that modern financial services sector are adopting for banking and insurance systems, the international Basel III for the banking system and Solvency II for the Euro area insurance system being cases in point.

These modern regulatory best practices minimise scope for black-box insurance/pension fund management as appears to be the case in Zimbabwe.

They offer a solid transparent framework for the assessment of insurance company business performance, which with zero-tolerance accountability framework, can deter incapable and corrupt management.

Martin Tarusenga is a board member of Zimbabwe Pensions and Insurance Rights.

Opinions expressed herein are those of the author and do not represent those of the organisations he represents

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