The Sunday Mail
Tawanda Musarurwa
The cost-to-income ratio is a vital metric for gauging the efficiency of a business operation, but it is probably an even more important metric for pension funds.
First things first, pensions funds are not ‘productive entities’, in the strictest sense of the term.
They generate ‘profits’ from members’ pooled funds largely through investing.
But, in the local investing climate, whose yields have been dragged down by inflationary pressures in recent years, keeping a close eye on the cost-to-income ratio is ever more important.
“Something as small as an additional half-a-percent increase in asset-based fees would reduce a member’s retirement income by as much as a fifth of what it would have otherwise had been after a full career of loyally and diligently contributing,” says actuary Mr Gandy Gandidzanwa.
In its pensions report to June 30, 2021, the Insurance and Pensions Commissions (IPEC) expressed reservations over an observed upward trajectory in the local pensions industry’s expenses-to-income ratio.
“Expenses to contributions ratio was 27,5 percent, whilst the expenses to total income ratio was 2,81 percent for the year ended 30 June 2021, compared to 27,98 percent and 1,13 percent in 2020, respectively.
“Whilst the expense to total income was 2,81 percent, the expenses to total realised income was, however, at 8,43 percent. This implies that part of the industry’s income is not realisable and cannot be used to meet the expenses and other immediate obligations.
“In order to curb expenses, the Commission is working on a legal framework to regulate expenses.”
For the pensions sector, one of the factors that may be contributing to the rise in the cost-to-income ratio is the Covid-19 pandemic.
Even though the devastating health pandemic has highlighted to companies and organisations the possibilities of operating with a lean staff, the implementation of new technologies and business processes has come at some cost.
The problem with pension funds that are cost-heavy is that only a few investment assets are returning consistently good yields.
And such investment assets are absolutely necessary, given that most occupational pension funds have shifted to the increasingly popular defined contribution (DC) scheme (over 95 percent of occupational pension funds in the country currently use the DC scheme).
Unlike the defined benefit (DB) schemes, DC schemes do not guarantee a specific income at retirement, and they are hugely dependent on the employee’s contributions and the performance of the pension fund’s investment.
A complex structure of fund management fees and charges has also contributed to inflated operating costs.
According to Mr Gandidzanwa, the fees structure as relates pension funds are opaque, with possible charges including: asset-based fees, per-member-per-month fees, percentage of salary, percentage of contributions, fixed per fund fees, performance-based fees, flat fees, time-based fees, and project-based fees.
Other fees that can potentially be deducted from a member’s contributions include actuarial fees, auditing fees, investment consulting fees, legal fees, risk-broking fees, compliance fees, risk-management consulting fees, manager selection charges, guarantee charges, capital charges, performance fees, platform fees, and policy fees among others.
He suggests an all-in fee, but of course, keeping in mind Zimbabwe’s unique circumstances.
“In some markets, regulatory authorities have gone the all-inclusive cap on fees route. The beauty of an all-in fee is that, not only is it easy to measure and compare, it also views retirement savings management as one product, which is exactly what it is.
“An asset-based fee cap of 0,75 percent on annual management fees has been set in some countries,” said Mr Gandidzanwa.
