Can pension funds regain public trust?

Tawanda Musarurwa

AS the common proverb goes, “Fool me once, shame on you; fool me twice, shame on me”.

It is typically encouraged for people to learn from their mistakes and past experiences in general.

Pension funds are currently operating in an environment of mistrust from the public, largely due to the many factors that have negatively affected the country’s economy over the past two decades.

Around 2008 and 2009, Zimbabwe experienced hyperinflation, which eroded the value of most savings, including pension savings.

But what is the cost of mistrust for Zimbabwe’s pensions sector, given the sector’s role in securing the financial status of retirees and the significance of its contribution to the broader economy?

One figure could be telling: by the end of 2022, 313 occupational pension funds were under dissolution.

Old Mutual Life Assurance Company general manager Ms Lindah Mariwande said Zimbabweans need to look beyond previous value loss experiences, if they are going to make solid financial decisions for the long term.

“Savings are important for a country. So, when we vote with our purses and say I will not put it in there (pensions), do not complain when you do not have roads, do not complain when you do not have infrastructure, and do not complain when industries are floundering.

“We need to re-orient and ask ourselves for how long we are going to be angry; for how long we are going to have this mistrust.

“We need to question some of the decisions that we are making from the pain that we have experienced,” Ms Mariwande said during the 48^th Zimbabwe Association of Pension Funds (ZAPF) annual congress.

As alluded to by Ms Mariwande, all things being equal, pensions should serve to aggregate savings for investment into key economic areas.

So, when a country’s pensions industry underperforms, this diminishes the pool of funds available for investment into critical infrastructure, for example.

But at their core, pensions are an important long-term savings vehicle for individuals, thereby contributing to wealth accumulation and retirement income security.

Continued public mistrust in the local pensions system has the potential of creating a vicious cycle of an underperforming industry resulting in many individuals struggling in retirement, and becoming heavily dependent on State welfare systems.

Notwithstanding the general lack of confidence in the long-term sustainability of capital values and returns because of inflation concerns, the local pensions sector still faces several challenges.

The sector is struggling with contribution arrears, relating to issues such as sponsoring employers facing viability challenges, and an increase in informal employment.

The problem of contribution arrears has also been worsened by employers that have increased non-pensionable allowances.

Low pension accumulations are also a result of partial withdrawals on job switching.

Declining pensions contributions can negatively affect a country’s savings levels, and negatively impacts economic growth.

In a 1991 working paper titled, “What is the impact of pensions on saving?”, economic scholars Alicia Haydock Munnell and Frederick O Yohn highlighted that when pension contributions decline, individuals may save less for their retirement, leading to lower overall savings levels in the country, which can have long-term implications for financial stability and welfare.

On the other hand, with most pension funds heavily invested in property assets, some of these investments have been affected by rent defaults by sitting tenants (both commercial and residential).

Official figures from the Insurance and Pensions Commission (IPEC) show that property investments accounted for 44 percent of the pensions industry’s total investment portfolio in 2022, up from 30 percent in 2021.

The issue with pension funds over-investing in real estate is that such investments tend to lock in capital in the near term, which reduces their liquidity and thus capacity to meet short-term obligations.

Given the above, and in addition to information asymmetry, pension funds are also faced with the challenge of high expectations from their members, further contributing to the mistrust.

Perhaps, largely because of the 2009 value loss to savings and other structural issues at the pensions industry level, Zimbabwe has a modest value of retirement savings relative to the size of the economy.

With the Zimbabwe National Statistics Agency (ZimStat) estimating the country’s gross domestic product (GDP) at around US$28 billion in 2021, pension funds’ assets accounted for just 6 percent of that GDP figure at the end of 2022.

Data from IPEC shows that the pensions industry assets stood at US$1,65 billion as at December 2022, down from US$2,94 billion in the prior year.

According to the United Nations University World Institute for Development Economics Research, the proportion of assets in retirement savings to GDP for South Africa is over 90 percent; Namibia has over 70 percent of total assets in retirement savings to GDP, and Botswana is at over 42 percent.

This shows that Zimbabwe’s pensions industry has a huge scope for expansion and contribution to the economy.

But, this requires a mistrusting public to get onside.

Pensions industry practitioner and Comarton Consultants managing director Mr Richard Muirimi has encouraged local pension funds to invest in assets that generate regular income in foreign currency to negate the impact of inflation.

“We must pick up those assets that we know are United States dollar-focused in their facing and the actual regular income that they generate,” he said.

“Another investment that we should consider is farming, which can create annuity income of export proceeds for a minimum period of 20 years.”

In November 2020, Government promulgated Statutory Instrument 280 allowing for new pension and insurance business to be underwritten using foreign currency.

In terms of this legal instrument, pension funds are allowed to settle obligations in US dollars, if the premiums were received in that currency.

Local pension funds are also now allowed to hold foreign investments equivalent to 15 percent of their total assets.

IPEC director of pensions Mr Cuthbert Munjoma said 11 pension funds paid benefits in foreign currency amounting to US$462 477 in the first quarter of this year.

Mr Muivimi said more pension funds should start paying US dollar pensions.

However, the 11 pension funds that paid benefits in foreign currency account for just 2 percent of the active pension funds.

According to IPEC, of the 981 registered occupational pension funds as at the end of 2022, 504 were active.

Rebuilding trust will also require that yesteryear’s macroeconomic and pensions industry problems are addressed effectively.

The Justice Smith Commission of Inquiry, appointed in 2015 to probe the conversion process that resulted in the 2009 value loss, noted that demonetisation of the local currency and poor regulatory enforcement were largely to blame.

In 2022, IPEC issued 32 circulars aimed at strengthening the regulation of the pensions sector.

This also comes as the Pension and Provident Funds Act (Chapter 24:32) was promulgated last September.

Legal practitioner Mr Nobert Phiri says the new pensions law addresses some gaps highlighted in the Justice Smith Commission of Inquiry report.

“The Act carries through provisions enhancing consumer rights,” he says.

“It incorporates universally-accepted principles for adequate financial consumer protection to ensure protection of the rights and benefits of fund members and their beneficiaries.”

However, the existence of a law can only achieve so much; with respect to firm level factors, local pension funds should comply with basic expectations of their model.

For instance, the regulator has continually raised concerns over pension fund expenditures that are outweighing pensioners’ benefits.