Guest column: Abisha Ndoro
The occupational pension fund industry in Zimbabwe is a national crisis. A collective introspection by industry practitioners, boards of trustees, regulators, policymakers and other stakeholders is now necessary in addressing the myriad of underlying problems and reposition pension funds on a platform of long-term sustainability for future generations of retirees.
The purpose of this, and subsequent articles, is to begin a process of stimulating debate as we examine the problems besetting the pensions system and crystallise thoughts around the appropriate reforms in rejuvenating pensions in Zimbabwe. The problems are clearly deep and complex, ranging from an uncertain and unpredictable operating environment, currency instability, leakages through high expense ratios, ineffective regulatory oversight, ineffective investment strategies and asset write offs in some cases. Thought leadership and a collective effort by all players is now necessary if we are to soberly address the real and very serious problems that are threatening the existence and survival of pension funds as effective vehicles for post-retirement financial provision. This is not about apportioning blame. This is driven by a real and genuine desire to analyse the problems and institute the appropriate structural reforms.
While there is no doubt that the economic misfortunes that have continued to beset Zimbabwe in the last three decades largely contributed to the problem, I firmly believe that there are other serious systemic issues within the pension system that also contributed to the wanton destruction of value in members’ pensions. The sober reality is that we have a generation of pensioners who have retired into abject destitution and realistically very little can be done at this stage. The system has totally failed them. As an industry, we should draw real lessons from the past two decades and begin a process of instituting real reforms and interventions in reinventing the industry and safeguarding future generations of retirees.
So why is the recovery of a vibrant pensions industry so critical that it should not be allowed to fail? Apart from pension funds being effective vehicles for providing old age income security, the pension fund industry is a critical platform for mobilising and generating the nation’s long-term domestic savings. A vibrant and well – functioning pensions system deepens capital markets and strengthens the financial system. Pension funds, by virtue of their long-term investment horizon, are critical drivers of infrastructural development the world over. This is particularly crucial for Zimbabwe where a major policy imperative at this time is around harnessing and mobilising resources for infrastructural development. The critical point, therefore, is that no real long-term economic development is practical without a supportive and vibrant pensions industry.
While indeed the problems besetting pension funds in Zimbabwe over the past two decades are deep and complex, my view is that an important starting point in beginning the processes of unravelling the structural shortcomings of our pension system is to closely examine the investment management within these pension funds, particularly with respect to life assurance company underwritten pension funds.
The primary objective of a pension fund is to ensure the members’ contributions grow in real terms over the long term to afford its members with a pension income they can be expected to live on after retirement. All policy decisions affecting the management and operation of the fund, including the formulation of the fund’s investment policy, risk management and indeed all major decisions taken in connection with the pension fund are informed by this primary objective. Pension fund resources are deployed in various asset classes to ensure that they grow throughout the active working life of a contributing member.
The inherent structure of the Zimbabwe pension system is that the generality of pension funds are arranged through life insurance companies. These are called insurance company underwritten pension funds, or insured Funds. These funding arrangements operate on the basis of the life assurance companies entering into policyholder contractual arrangements with Pension Funds. It is particularly important to fully understand how this structure works. In very simple terms, the life assurance company collects member contributions and pools together all such contributions and other premiums from all its policyholder pension funds and deploys these resources by investing in various instruments, such as property, shares, bonds, among others. On a regular basis, the life insurer reviews the performance of its underlying investment portfolio attributable to its pension portfolio and declares a dividend, known as a bonus to its policyholder pension funds. The pension fund would ordinarily receive a regular statement showing all cash inflows and outflows from its pension fund account, including the final dividend, or bonus declared to the Pension Fund. In reality therefore, the liability of the Life Insurer towards its pension fund policyholder is limited to the cash balances as reflected in the pension fund statement.
The real underlying assets are held in the name of the life assurance company. In practice, variations of this model exist, but is general terms this is the underlying structure.
The contractual arrangement is that should a Pension Fund wish to terminate the contract with the Life Insurer, its obligation will be limited to the cash balances as reflected in the Pension Fund statement. In an unstable and inflationary operating environments as has subsisted in Zimbabwe over the past two decades, these insured Pension Funds whose assets are primarily limited to cash, were totally exposed to the ravages of inflation in the absence of inflation — hedging strategies within these Pension Funds.
Herein lies the problem. Pension Funds whose members directly contributed to the development of all the life insurance owned commercial properties that we see in Harare, Bulawayo and elsewhere, have no legal right of title or direct claim on such real investments. As a result, as the Pension Fund balances plummeted in value, so did members’ emerging pensions.
Insured Pension Funds have their time and place. The stable and low inflation environment of the 1980’s through to the early 1990’s resulted in such underwritten Pension Funds delivering real value to members and retirees. When inflation increasingly became out of control, such structures became totally inappropriate in protecting and safeguarding value. Pension Funds that had direct exposure to property and other real inflation hedging assets fared way better.
Further it can further be argued that the lack of direct ownership and control of underlying assets within these insured arrangements exacerbated the problems associated with the currency conversion exercise in 2009. Indeed, if ownership of real assets by Pension Funds was clear and directly accounted for within each individual Pension Fund, the valuation and conversion process of members’ accrued benefits would have been much more objective and transparent, as this would have involved a simple valuation of an asset from Zim dollar to its US dollar equivalent at the time of currency conversion. I would therefore argue that a general policy shift towards ensuring that Pension Funds own real assets for, and behalf of their members is such a major and crucial step forward in strengthening and reforming the pension system in Zimbabwe.
The industry should now soberly and objectively examine the appropriateness and relevance of the insurance underwritten pension arrangements in the current operative environment, which is still far from certain. I honestly believe that this simple step of ensuring that real assets are under the management and control of the Pension Funds themselves will yield tremendous benefits for the industry and its members. This is an intervention that is, in my view, so necessary in protecting and curbing value destruction within Pension Funds whose members feel, quite rightly, that the system has totally failed them.
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.