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Deceitful accounting of pension funds


Requests for help submitted by the growing membership of the Zimbabwe Pension and Insurance Rights Trust is revealing, with startling information and data on potential erroneous accounting of pension and insurance funds by insurance companies.

Of note is the accounting method and approach used on dollarisation in 2009, to arrive at the equivalent real US$ worth of Z$ pension fund member pools of contributions accumulating over many years.

The pools of funds had accumulated from member contributions made via the Z$ currencies; namely; the Z$ in use prior to the rebasing in July 2006, the Z$ in use between July 2006 and August 2008 and the Z$ in use after July 2008.

These Z$ currencies have come to be known as the first, second and the third Z$. The second Z$ was derived from the first Z$ by removing three zeros from all first Z$ amounts, while the Third Z$ was derived from the second by removing ten zeros.

It was and is critical that the conversion of these member contribution pools to US$ be absolutely accurate, transparent and fair, as these pools constituted lifetime savings.

Insurance companies could either have converted the Z$ pool amount accumulating as at the point of dollarisation to its equivalent real US$ worth, or they would long have taken the accounting approach to convert each Z$ contribution to an asset with its equivalent purchasing power or real US$ worth, at each point the pension fund member made the contribution, thereby keeping an equivalent real (US$) account of each members accumulating fund.

In its merit, the latter second method was, and is, in keeping with the investment mandate insurance companies have from pension fund members and insurance policyholders.

This requires them to prudently maximise investment returns subject to taking calculated risks and such as to meet benefit obligations taking into account the members and policyholder reasonable expectations.

It is one of the reasons why insurance companies are known to invest in buildings (property) such an investment can be considered as a conversion of member contribution pools to the property.

As inflation raged on, it had long become increasingly practical for both institutional and public transactions to be converted to their real worth equivalents, or at the very least to be marked or to be compared to their equivalent real worth this in pretty much the same way member contributions had been converted to buildings.

In this era, it was a public secret that ordinary people and institutions alike, converted and stored the Z$ fruits of their hard work to real currencies and/or to the real goods themselves this in keeping with the latter conversion approach. This approach is nothing really new as it happens to be one of several practices long known technically as hedging against inflation.

Skewed exchange controls, however, prevented the transparent use of market-driven foreign exchange rates to hedge against inflation. The selective approach to which foreign exchange controls could be applied harshly to the general public was nevertheless dared it was outright nave and/or suicidal not to do so.

The market-driven exchange rates were readily available from the thriving foreign currency street traders. Reliable information had it that financial institutions had long been key players in the street markets.

In the circumstances, insurance companies were called for to act in good faith and to implement the latter real worth accounting and conversion method otherwise they should have declined to take pension fund member contributions.

The government eventually saw sense and dollarised in 2009.

The former method of converting the Z$ pool amount accumulating in 2009 would have worked if the third Z$ currencies were stable currencies, and currencies that remained in demand at the foreign currency exchange markets.

There would not, however, have been any need to dollarise if there was this stability and demand for the Z$. Contrary to this economic requirement for stability and demand, the Z$ currencies had systematically lost value to the point when the third Z$ was worthless. It had no real (US$) worth translation it could therefore not stand as a unit of accounting.

Small wonder, the drastic penultimate loss of value in the second and third Z$s, coincided with the abrupt disappearance of the street foreign currency exchange markets.

On the advice of their actuaries, insurance companies proceeded to use these worthless exchange inconvertible third Z$ cumulative balances to arrive at the US$ value of pension fund member investments.

Of course they got zero US$ values. When they figured out that zero US$ values would not make much sense to the investing public, they turned to using the same worthless exchange inconvertible third Z$ cumulative balances to . . . allocate assets . . ., and started enforcing minimum benefits to pension fund members.

Apart from disregarding the specifications of pension fund rules and other contractual requirements, insurance companies conveniently disregarded the real worth of the contributions made by members for many years before the worthless third Z$.

The real worth of especially the first Z$ had been converted to realness including buildings and other real assets or should have been converted to realness.

Passing such accounting practices would be tantamount to passing deceit.

Martin Tarusenga is a board member of Zimbabwe Pensions and Insurance Rights, email, martin@zimpirt.com; telephone; +263 (0)4 883057; Mobile; +263 (0)772 889 716

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