The Sunday Mail
Pension funds have long sold their ability to pool and grow policyholders’ funds.
So, it is within policyholders’ reasonable expectations to assume fair returns when their monies fall due.
But there are always mitigating factors.
Although not explicitly stated in the National Social Security Authority Act (Chapter 17:04), the principle of social solidarity is a fundamental guide for the state-run pension fund’s operations.
With regards to defined benefit (DB) pensions models, social solidarity is assumed by two factors. First are ‘collective contributions’, that is, solidarity between employers and employees as they both collectively contribute equal portions to safeguard the wellbeing of the employee. And second, perhaps more importantly, ‘intergenerational solidarity’, that is, current contributors pay for current pensioners and subsequently the future generations will pay for current contributors.
Sometimes things do not always work like clockwork.
There are numerous factors that can affect the expected outcomes of a pension fund.
Zimbabwe’s macro-operating environment is laden with such factors, and these include increasing informalisation, inflationary pressures, job losses, and low disposable incomes.
Earlier in September, NSSA’s acting director for contributions, collections and compliance, Agnes Masiiwa highlighted some of the challenges facing the Authority.
“There is poor compliance culture across businesses. The NSSA contribution base is shrinking and we have had company closures, persistent liquidity challenges, informalisation of the economy and active labour migration, within the country and to other countries,” she told a virtual media engagement.
All things being equal, a DB scheme, through risk pooling, can provide a pre-defined income level at a lower cost than in private insurance where all risks for providing for lifetime security are borne by the individual at a much higher cost, with the possibility of losing everything depending on economic circumstances.
However, on the other side of the coin, in an economic environment that is not working efficiently, the scheme will bear the brunt of the economic burden.
The DB scheme is a promised benefit that guarantees payment of benefits usually based on a formula that takes into account the individual number of insurance years (contributions credits) and the amount of earnings over the same period, hence NSSA has to pay regardless.
Beyond the state of the macro-economy, NSSA has its own structural limitations. Observers have noted that the Authority still lags behind other schemes in the region in terms of contribution rate. For instance, NSSA’s scheme is based on an insurable earnings ceiling (of $5 000), with the contribution rate split between the employee and employer at 4,5 percent each, giving an effective rate of 9 percent.
Comparably, Tanzania’s public sector scheme is based on a self-adjusting scheme with insurable earnings drawn from gross earnings, with the employer contributing 15 percent, while the employee contributes 5 percent, giving an effective rate of 20 percent. Although variations abound across countries the general regional trend is that most schemes are self-adjusting.
Indications are however, that NSSA is moving towards a self-adjusting framework for insurable earnings, which will enable benefits pay-outs to be adjusted more responsively.
Notwithstanding these challenges, the Authority increased its minimum pension for the Pension and Other Benefits (POBS) to $1 000, while the Accident Prevention and Workers’ Compensation scheme minimum pensions have also been increased to $1 000 with effect from November 1, 2020, following a 2020 ad-hoc actuarial valuation.
It also increased the funeral grant for both schemes from $2 000 to $5 000.
Prior to the latest substantial changes to benefits, the authority has since April 2020 been paying monthly discretionary bonuses, while it awaited the outcome of the actuarial valuation.
It may not be what pensions want or ‘reasonably expect’, but it’s the outcome of a delicate balancing act.
According to actuarial consultant Prosper Matiashe expectations also need to be realistic.
“Employers have generally minimised basic salary increases such that pension contributions will lag behind inflation, and hardship allowances, cushion allowance may not be included in amount used to calculate contributions yet they contribute a significant portion of salaries,” he told a Zimbabwe Association of Pension Fund (ZAPF) meeting recently.
“Do pensioners realise the misalignment of their contributions against inflation? When policyholders say we have lost value, they usually don’t think that Government is complicit. But sovereign State’s decisions can impact on value preservation.”
Positively, NSSA beneficiaries can legally benefit from other social security schemes.
The International Labour Organisation (ILO) recommended income replacement ratio for social insurance at 40 percent of insurable salary, which means that pension benefits from the state-run pension scheme are supposed to be complemented by other sources of income from occupational pension schemes or private insurance.
Government last week said it is looking to strengthen the country’s integrated social protection framework.
Said Finance and Economic Development Minister Professor Mthuli Ncube while presenting the 2021 National Budget:
“The pension system lacks an integrated social protection framework that speaks to all the basic three pillars namely: a mandatory National Social Security Scheme; private occupational pension fund and the Government pension fund, and voluntary retirement annuity contracts underwritten mainly through life assurance companies.
“The absence of a clear co-existence framework, results in pension arrangements imposing a heavy financial burden to employers. This becomes evident in a difficult operating environment characterised by viability challenges on the part of the employer.
“The Insurance and Pensions Commission (IPEC) is finalising detailed modalities on the operationalisation of the proposed integrated social protection framework.”