Dealing with the real risk of arrear pension contributions

The financial viability and long-term sustainability of occupational pension funds in delivering realistic retirement outcomes to its members depends to a large extent upon the sponsoring employers in remitting pension contributions timeously for investment by pension funds. Such contributions are deployed in various investment portfolios in building up and growing members’ retirement reserves.

Failure by an employer in remitting pension contributions is a red flag that is taken seriously by regulators, the world over. A wholesale failure to pay pension contributions by many organisations, as is currently the case in Zimbabwe, is nothing short of national crisis. The implications are dire, particularly for imminent retirees. Without receiving a regular flow of contributions, pension fund trustees have no option but to continue disinvesting from existing portfolios in paying matured benefits and management expenses. Further, the drying up of contribution inflows into the pension fund means that member fund values, instead of growing steadily are continually dissipated through monthly management expenses. This existing state of affairs, if left unchecked, is a clear and present danger for a pensions industry that is under serious threat on account of the huge erosion of trust by contributors.

Information gleaned from the Insurance and Pensions Commission website suggests that pension contributions by sponsoring employers that are owing to various pension funds as at September 30, 2019 were approximately $616 million. Based on an approximate industry asset value of $9,4 billion, the overall outstanding contributions account to approximately 7% of total national pension fund assets. This is a staggering statistic.

Whilst there is no doubt that these pension contribution defaults by many organisations point to the deep and complex economic difficulties that companies are going through, this cannot be an excuse for the employer to deduct employees’ pension contributions and effectively use these to finance ongoing operations at the expense of employees’ retirement welfare.

In formulating a practical remedial action plan, one cannot be totally insensitive to the broader macroeconomic problems, which have placed many institutions on survival mode over many years. In a normal environment, trustees can explore the option of taking legal action and approach the courts for redress. Whilst this is possible, the unintended consequence is the real prospect of placing the organisation under even greater operational jeopardy, particularly when its assets are subjected to attachment. These would place the sponsoring employer under even greater threat of operational failure, the real threat of job losses and even liquidation. This does not serve anyone’s interests. Whilst the regulator can read the riot act to defaulting institutions and demand an immediate payment plan within a given time-frame, this may still be impractical as a number of these entities simply cannot make good on their financial commitments to the pension fund, and other statutory obligations.

What can, therefore, be done to safeguard the interests of pension fund members, and at the same time not threaten the financial viability and ongoing survival of the sponsoring employers, many of whom are clearly in financial distress?

I would like to present a number of practical proposals particularly for the larger employers.

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These proposals are premised on a real and genuine commitment by both company boards, its executive and the fund’s board of trustees in addressing these pension contribution arrears and in a manner that is sensitive to the financial challenges faced by many employers.

Employers with unencumbered fixed property investments, such as the company operational premises and other real estate assets may consider an arrangement where a proportion of such properties is ceded to the pension fund. These can be achieved on a unitised basis, effectively resulting in a co-sharing of fixed property between the employer and the pension fund. In other words, the pension fund may be offered say 15% of the company’s operational premises based on an equitable valuation of such assets. The pension fund gets the exposure of a direct property investment and a proportion of the rental yield. The sponsoring employer enjoys the immediate financial relief in fully amortising the contribution arrears, resulting in a much tidier balance sheet. Members get the financial safeguard of a real asset within their pension fund. This entail a real and earnest dialogue by the company board, management and pension fund trustees.

Employers with a relatively easier access to land, such as local and municipal authorities may wish to consider ceding serviced land, or other residential or better still, developed commercial property in liquidating the outstanding contributions. Appropriate mechanisms would be necessary to ensure equitability by both parties and full legal title by the Pension Fund itself on such real assets.

A third option in addressing this problem is premised upon a firm realisation by the company board and its shareholders around the long-term intrinsic value created by the employees in the growth of the business. Premised on this understanding and a genuine effort in safeguarding employees post retirement welfare, company boards and pension fund trustees, guided by professional advisors, may examine the practicability of ceding a portion of the company’s equity holding to the pension fund as a private equity investment, to be registered in the name of the pension fund.

This would be a negotiated process that should be equitable, based on an objective valuation methodology and takes account of the size of outstanding contributions and reasonable interest to the pension fund.

In fact, such an approach would in my view present a real economic benefit to employees through a structure that affords real ownership of a portion of the business through the pension fund. These are practical non-cash asset swap arrangements that require a real and earnest commitment by all parties in protecting the employees’ retirement scheme. It is critical that such arrangements should thereafter be formalised in appropriate legal contracts that provides appropriate safeguards to both parties.

Related to this broader effort of regularising pension funds should be a much closer and holistic examination of the overall pension funding structure by the sponsoring organisation.

The contribution rates should be set at levels that are reflective of the financial realities faced by the employer given its operating environment. Once a plan is made to amortise the accrued pension arrears, the employer should honour future ongoing contributions to the pension fund. I find it quite odd and surprising that entities that are in clear financial distress, including those that depend on a regular subvention funding from government for their very survival are still committed to pay as 15% towards the company pension fund. Such high pension costs in this difficult environment are not only financially unsustainable but render the institutions operationally uncompetitive.

Company boards should in my view take a much closer interest in the staff pension fund and through their appropriate board committees, receive regular reports on the financial position of the pension fund, and its capacity in affording decent and realistic outcomes to long serving employees. The fact that most pension funds are funded as defined contribution arrangements does not, in my view discharge the moral obligation by the board of ensuring decent post-retirement outcomes for employees.

In conclusion therefore, the state of pension contribution arrears is one of the most serious threats to the recovery efforts and survival of the pensions industry at this time. This should be addressed by all stakeholders and with urgency. This will require a genuine and real commitment by company boards, executive management, and pension trustees together with their professional advisors. A real start should be on the larger pension funds.

The regulator clearly needs to take a leading effort through an appropriate and enforceable regulatory instrument for all stakeholders to consider and formulate the various practical proposals and present a firm workable plan in addressing these contribution arrears within a realistic time-frame. I have articulated non-cash options for the larger employers in liquidating the arrears that protect both the pension funds and does not jeopardise the employers.

A great measurable way of addressing this would be broader industry in achieving a reduction in overall industry national contribution arrears to a much more acceptable benchmark.

Abisha Ndoro writes in his personal capacity as a pensions consultant having consulted to a number of Pension Funds in Zimbabwe and within the SADC region. Further Abisha is a former regulator in the non – banking financial institutions industry and his views are shaped by market developments and best practice standards within the region.

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