Insurance companies must own up

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A favourite excuse proffered by insurance companies for their failure to pay pensioners their full rightful pension benefits has been . . . inflation ate . . .
away funds set up to pay benefits.

In corroboration, a response to a letter claiming full benefits of a member of the Zimbabwe Pensions and Insurance Rights Trust, a pensions supervisor of one of the insurance companies patronisingly wrote back saying . . . the hyperinflation we all experienced in Zimbabwe up to the end of 2008 destroyed our accumulated wealth . . .

Other insurance companies have also responded in the same vein. Recent media reports quoted Jonas Mushosho, the Old Mutual life assurance managing director, blaming inflation for their failure to pay full benefits as inflation corroded asset value.

Of course the excuses patently and tacitly avoid mentioning how, exactly/categorically, inflation reduced value over the ten-year period which inflation evolved in Zimbabwe, while they stood watching it do so and how, on the main, their investment management practices contributed to the loss in pension funds.

Best practice requires effective documented investment strategies to always be in place for all interested parties to the funds.

At a broad level, the best practices legally require investments for each pension fund to be allocated to asset classes with investment performance characteristics that move in sync with the nature and attributes of pension benefits payments.

The nature of pension benefit payment, among other attributes, includes the simple fact a pensioner needs to be paid at some specific (often) known point in time; the benefit will be of a certain amount that can be calculated with relative precision; the benefit will have changed and grown in response to various factors including economic fundamentals such as inflation, exchange rates and interest rates.

The best practice therefore requires the asset class allocations that will meet the pensioner benefit payment to have the asset maturation period matching the benefit maturation.

The asset allocation will also need the asset maturity amount matching the benefit amount and of course for the asset allocation will need the asset value growth trends matching the growth trends of the benefit amount.

Technically the investment policy must be set up in accordance with the so called asset-liability matching techniques.

Insurance companies, in consultation with pension fund members of the pension funds, have the responsibility of setting out such an investment strategy or policy with these asset allocations.

This investment policy must be reviewed regularly to ensure it continues to be able to meet benefits, even when circumstances change.

Having agreed on the investment policy, the insurance companies as administrators must then competitively and professionally, select competitive and professional investment managers to invest the pension funds for each asset class as prescribed in the investment policy.

In selecting investment managers, insurance companies must require a minimum investment performance per period, say quarter-yearly, by selected investment manager that will ensure pensioner benefits are met.

In corollary the investment manager must undertake to achieve at least this minimum investment performance, failure which the contract will be cancelled with costs.

The investment manager must further, declare their investment management styles and demonstrate how they will achieve at least the minimum investment performance required.

Of course, such investment performance best practices, require specific competencies if they are to be executed correctly and if pension benefits are to be met.

Pension and insurance funds legislation and regulations, must regulate these practices to ensure the public and pensioners in particular are not prejudiced by fraud-inclined people, who falsify their competencies and masquerade as professionals.

Indeed the Council of the Organisation for Economic Co-operation and Development has in place core principles of Occupational Pension Regulation and Guidelines for Pension Fund Asset Management. It recommends that the pension fund regulations of its member countries adhere to these principles and asset management guidelines.

The International Association of Insurance Supervisors has in place best practices for insurance funds investments.

Investment management for pension and insurance funds in Zimbabwe is regulated under the Collective Investment Schemes Act; the Collective Investment Schemes Regulations; the Securities Act 2000 and the Securities Regulations.

These Acts have no express regard for pension and insurance business objectives they therefore do not have the express regard for pension and insurance funds investment requirements and best practices.

Apart from requiring insurance companies to hold a proportion of pension and insurance funds in government bonds, the Pension and Provident Fund Act and the Insurance Act of Zimbabwe do not provide for insurance companies to comply with such best practice investment management that ensures benefits are met.

In particular the latter two Acts do not expressly require the former set of Acts and Regulations to internalise the specific objectives of pension and insurance provision.

The Acts do not categorically require both insurance companies and the Investment Acts to maintain investment policies and to publicly report to pension fund members on how the funds are performing and whether they are on target to paying benefits.

Given these relaxed pension fund investment management regulations, insurance companies have managed pension and insurance funds without any consideration of whether or not they will meet pension benefits, and without any accountability.

The spate of demutualisations and the ensuing black-box management of insurance and pension funds begets cartel-like investment management approaches.

This cartel-like investment management saw pension and insurance funds investment being run autonomously within holding company frameworks.

Without any regulatory control and without any accountability, opportunities for very high-risk investment in projects linked to their personal businesses and which businesses are prone to fail, could not be ruled out.

The failure of these high-risk investments of course meant some pensioners would not be paid their benefits.

Martin Tarusenga is a board member of Zimbabwe Pensions & Insurance Rights, email martin@zimpirt.com.

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