Is the pensions industry an inherently flawed system?

Tawanda Musarurwa

You can’t build a great building on a weak foundation. You must have a solid foundation if you’re going to have a strong superstructure – Gordon B. Hinckley

American clergyman, Hinckley, was probably not referring to construction per se, because foundations are important for almost everything.

Therefore, when problems emerge, it is probably a good idea to look at the foundations.

According to Insurance and Pensions Commission (IPEC) data, as at June 30, 2021 the country had 976 registered occupational pension funds.

Insightfully, a significant number of these pension funds are inactive.

“The Commission is still concerned with the high number of inactive funds, which constitute 37 percent of the total funds,” said the regulator.

“As such, work is underway to resolve them in line with the Framework for Resolution of Troubled Entities.”

Perhaps more concerning is the general slowdown in economic activity that has resulted in an erosion in the values of pension investments.

To counter this, pension funds have gradually been shifting from simply investing in stocks and bonds to ‘alternative investments’ or private sector investments, which carry more risk.

The logic behind this change is that investing in equities or bonds only works to circulate money among a limited number of investors, but targeting alternative investments can create new and sustainable wealth.

The significant difference between the two investing models is that while investing in assets such as stocks only require pension funds to hire investment managers, alternative investments may sometimes require management systems from the pension funds themselves.

However, are pension funds structured to operate business entities?

Legislation typically determines the structure of pension funds, and therefore how they operate.

In Zimbabwe, the Pensions and Provident Funds Act (Chapter 24:09) – which is currently under review – provides for the registration, incorporation, regulation and dissolution of pension and provident funds.

The law dictates that occupational pension schemes should be set up under trust.

A trust is a legal arrangement under which trustees hold the assets of the pension scheme in a trust fund for the benefit of the members of the scheme and their dependants, and for the main purpose of providing income in retirement.

Actuary Mr Gandy Gandidzanwa has proposed a rethink on how pension funds are structured.

“My biggest problem with the (Pensions and Provident Funds) Act and the provision of retirement fund services currently in Zimbabwe – and in many other countries – is this whole idea of housing a retirement fund under a trust structure,” he said.

“That is where we have got problems. Everything else that we have around that legislation emanates from the point that retirement benefits are housed under a trust structure, so they are guided by trust law, when in fact, I think there is now clear evidence that maybe housing retirement benefits under a different type of law will be more effective.”

Mr Gandidzanwa said company law, for example, would take away current limitations on pension funds.

“For instance, this whole notion of having trustees running the fund. You tend to have trustees that are half-engaged, half-interested, and incompetent.

“Can you imagine if a pension fund was to be run as a for-profit business, under company law, with dedicated shareholders and a management team? And, these different entities being allowed to compete among themselves for members.”

Can trustees be trusted to effectively manage pension funds in a fast-paced business and investment climate?

For instance, traditionally local pension funds, in particular, have long heavily invested in the property sector, but this has come back to bite them due to the negative impact that the Covid-19 pandemic has had on rental incomes.

The matrix around the devastating impact of the pandemic goes far beyond this simple example, and the question is, do trustees have a full appreciation of the entire scope of the new challenges and possibilities?

The answer is not simple.

Development economist Mr Prosper Chitambara said the macro-environment of pension funds has evolved, and that the entities themselves should follow suit.

“Despite several amendments, the Pension and Provident Funds Act is outdated and is not flexible enough to take into account the ever-changing trends in management of pension funds,” he said.

“The current pension legislation does not adequately reflect the increasing sophistication and ambition of pension funds.”

Mr Chitambara highlights some current limitations imposed on local pension funds, including the inability to invest offshore, and the requirement for them to hold at least 20 percent of their investments as prescribed assets.

As indicated earlier, the Pensions and Provident Funds Act is being reviewed, with the several adjustments contained in the Bill looking to address problems ranging from the lack of operational independence in some of these funds, poor quality of board structure and board appointments, and the failure to deal with conflict of interest at board level.

Adjustments will also address issues of capacity limitations of the regulator (IPEC), absence of policy on troubled institutions, capital adequacy determination criteria, absence of disclosure measures, and accountability and transparency in the industry as a whole.

Nevertheless, maybe, just maybe, the entire legal framework of the pensions industry should be upended.