Pension funds seek clarity on forex business regulations

20 Dec, 2020 - 00:12 0 Views
Pension funds seek clarity on forex business regulations

The Sunday Mail

Tawanda Musarurwa

It’s not uncommon that some solutions can bring additional questions; answers to such questions tend to give clarity as to the efficacy of the proposed solution.

For quite a while now, Zimbabwe’s pension funds and insurance companies have been lobbying Government to allow them to carry out business in foreign currency, largely to protect members and policyholders’ monies from inflationary pressures.

And Government responded by promulgating Statutory Instrument 280 of 2020.

The policy obviously addresses the main problem that pension funds and insurers were complaining about.

Unlike its regional counterparts, Zimbabwe did not allow these entities to carry out business in foreign currency.

Previous restrictions in transacting in foreign currency had resulted in some companies diverting business to external markets with consistent and flexible monetary policies and ease of movement of funds in their banking systems.

Local insurers and pension funds had to seek approval from the Insurance and Pension Commission (IPEC) and the Reserve Bank of Zimbabwe (RBZ) to issue out any policy in foreign currency.

But the slow movement of funds in the banking system compounded the difficulties in operating US dollar policies particularly at claims payment.

SI-280 seeks to address some of these key concerns.

According to the new regulations “it shall be permissible to charge and to tender foreign currency in payment for the following transactions — international travel insurance; motor insurance for vehicles in transit; customs bond insurance; bank cash in transit; third party motor insurance payments for foreign-registered vehicles; safari operators insurance; export credit insurance; importers and exporters on cost, insurance, and freight; exporters’ insurance, including mining houses and tobacco merchants; special insurance policies for strategic national assets, including electricity equipment and stations, and aircraft equipment.”

Part of the amendments also allows for payment of insurance premiums by any individual or entity holding free funds, which effectively means all insurance businesses can now be traded in foreign currency.

Earlier in March, the monetary authorities moved to allow the use of free funds ostensibly to ease transacting for the general public.

And to the extent that a key component of the pensions value chain is investments, Government will also require pension and provident funds to “invest the contributions in investment instruments denominated in the same currency the contributions are made; and in respect of fund members whose contributions have been paid in foreign currency, through Nostro accounts, pay such member’s benefits in the currency in which the contribution has been paid.”

But Zimbabwe Association of Pension Funds (ZAPF) director general Sandra Musevenzo says there are some grey areas that need clarification.

“The first issue, which is not clear to members is where will the money be invested? Because as long as the money sits in Zimbabwe or invested on the ZSE, which is denominated in local currency, you cannot say you are contributing United States dollars, which are then converted to Zimbabwe dollars. We don’t have assets that are denominated in US dollars, which will then protect member values, which are being contributed in US dollars, except for the Victoria Falls Stock Exchange (VFEX) that has one counter.

“If we are going to put it on the money market, it will also be converted to Zimbabwe dollar. Currently there are no assets where pension funds can invest in, which are denominated in US dollars,” said Ms Musevenzo.

“Secondly, what does it mean from an administrative point of view. We already have guidelines, which are being implemented right now, to say let’s have sub-account ‘A’ for those investments that were done in US dollars for a certain period, then we have sub-account ‘B’ for those investments that were contributed in Zimbabwe dollars.

“Now we are going to create a third sub-account, where we say we invested in US dollars again, so from an administrative point of view that also needs to be addressed because it’s not clear. The IPEC has not said anything on how we going to administer these various contributions.

“We need to understand what does it mean from a regulatory point of view, from a legal perspective, from an accounting perspective and from an actuarial perspective.”

The VFEX presents insurers and pension funds with an opportunity to create investments portfolios where assets and liabilities match, given that the industry has US dollar-denominated liabilities, but – as indicated by Ms Musevenzo – the bourse is still very much nascent.

The present lack of US dollar assets for these entities to invest in locally, will likely compel term to look outside the country for forex-yielding assets.

Zimbabwe’s mandatory pension fund, the National Social Security Authority (NSSA) has done this successfully with a US$20 million investment in regional financier Afreximbank that has been particularly impressive, yielding US$2 million in dividend payments between 2017 and 2018, and US$1,18 million last year.

The social security scheme has sought to replicate the success of its 2017 investment in Afreximbank by recently acquiring a US$1,7 million stake in a regional reinsurance company.

Notwithstanding the emerging questions, the move by Government to allow insurers and pension funds to do business in foreign currency has the potential to restore both trust and viability of the sector in the long-run.

Said Insurance Council of Zimbabwe (ICZ) executive officer Tendai Karonga this week:

“By allowing for payment of insurance premiums using free funds, the SI-280 has brought the necessary stability to insurance transactions where an asset liability match is possible.

“Insurers may now charge correct premium reflective of the risk carried as placed by the policyholders. Policyholders can now be confident that their insured covers are not affected by inflation consequently eliminating under-insurance.

“Credibility of the insurance industry is heavily dependent upon timeous payment of claims. There is need to actively engage with the RBZ to ensure the existence of a system that allows timeous movement of claims payments.”

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