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Enacy Mapakame
AUTHORITIES must continue with efforts to restore macroeconomic stability through strengthening the exchange rate given the depreciation of the local currency posed a serious threat to the viability of pension funds, pension values, and ordinary savings, industry experts said.
Authorities have swiftly responded to the recent resurgent depreciation of the domestic currency, largely pronounced in May, through various policy interventions to address both supply and demand side factors that were driving the volatility and inflation.
The interventions included tightening the monetary policy, liberalising the exchange rate regime, refining the auction system, transferring eternal sector obligations from the Reserve Bank to Treasury, and allowing retailers to retain 100 foreign from domestic sales.
On Friday, the Ministry of Finance and Economic Development stressed that the Treasury would only accept quarterly payment dates (QPDs) settlements in local currency to promote the use of the Zimbabwe dollar in the economy.
The Government believes the measures will strengthen the exchange rate and restore sustainable macroeconomic stability, including holding prices constant, after the recent resurgence.
Already, there has been continuous stability of both the parallel and official market exchange rate in development authorities and economic analysts are confident the policy interventions have laid a firm foundation for prolonged stability.
But the developments over the past few months had evoked memories of the 2008 hyperinflation period when most pension values and savings were wiped out by hyperinflation.
Following the economic meltdown over the decade to 2008, some pensioners received annuity payments equivalent to U$$0,80c, while others received lump sum payments as low as US$30 as compensation for over 10 years of consistent contributions.
The Government and industry are still working on a compensation plan for the value loss that occurred during that period.
Some pensioners are already wary of the threat of value erosion after the local currency weakened to US$1: $6 862, as of June 26, 2023 from US$1: $796 as of January 31 2023 on the official market.
The parallel black market has paced even faster, which has serious potential negative effects on pension values and the savings of vulnerable members of society.
Already, pension incomes are rapidly losing purchasing power and older people by nature are not flexible enough to deal with the volatility of the economy as much as young people do.
One pensioner, Nyepudzai Njuzu says she does not want to relive the experience of 2008.
“Well, we know that 2008 was a year to forget for the Zimbabwean pensioner,” she said in an interview.
“Now, history may repeat itself again, thanks to the depreciation of the local currency against the US dollar. It is devastating for the pensioner, who rely on their small pensions to make ends meet.
“We have seen the value of our own pensions eroded by inflation, and now the Zimbabwe dollar (weakening) could make it completely worthless,” she said in an interview.
Another pensioner, Rukudzo Mbetsi said while there have been efforts to regularly review payouts alongside a US dollar component, pensioners still remain in a predicament as the cost of living has gone up significantly.
“It is incredible we are headed into this 2008 debacle again. Many pensioners are now struggling to afford basic necessities, such as food, medicine, and shelter. It is a disaster and we hope we do not experience that again,” she said, adding it was imperative for the Government to step in with solutions that can safeguard members against inflation.
As pooled monetary contributions from pension plans set up by employers, unions, or other organisations, pension funds provide for their employees or members’ retirement benefits.
In most countries, pension funds are the largest investment blocks and dominate the stock markets where they invest.
These are also susceptible to economic volatility with the devaluation of the local currency weighing heavily on pension fund values.
The National Social Security (NSSA) has acknowledged that pension funds are being threatened by the devaluation of the Zimbabwean dollar and that another predicament will hit the sector if the economic woes persist.
The rapid depreciation of local currency tends to devalue the US dollar value of any local investment while at the same time increasing the liability of pension funds raising sustainability challenges.
“Further complications are that beneficiaries of the pension fund will suffer from value loss on their pensions and will rightly demand payment in US dollar and or more frequent review to pension payouts.
“The combination of declining real returns caused by deprecation of currency that outpaces asset growth and frequent payout put pressure on the sustainability of any pension scheme,” said NSSA deputy director marketing and public relations Tendai Mutseyekwa.
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Looking at 2022 for example, the exchange rate rapidly declined from 108,66 in January to 684,33 by December 2022, implying a devaluation of 529,75 percent, yet the stock market was only able to gain 80,13 percent.
By implication, pension funds and other investors on the stock market lost 71,4 percent of their US dollar value in 12 months.
This is even worse when we compare other investments such as local currency investments.
Zimbabwe Association of Pension Funds (ZAPF) immediate past chairperson Rutendo Magorimbo said the sector has been shrinking since 2019 due to among other reasons dwindling contributions into pension funds with a drop of about 80 percent in US dollar terms in pension contributions compared to what was coming in before 2019.
“There has been a general trend where employers have been granting inflationary adjustments to cushion their employees in the form of non- pensionable allowances,” she said by email.
“This then means that for those companies that have not adjusted their pensions to be based on total income inclusive of allowances as opposed to just the basic pay – their contribution into the pension fund is not reflective of what they are earning,” she further explained.
To offset these challenges, she spoke of the need to revisit the structure of the pension fund itself.
She explained:
“Defined contribution schemes will not give the desired outcomes as all investment risks are carried by the fund member. This arrangement is impacted negatively, by short-term shocks.
“We need to perhaps start considering a hybrid of defined contribution and defined benefit or for the policymakers to consider having a social safety net to support the vulnerable pensioners when we have economic shocks.”
In a presentation highlighting the inflationary pressures on pension funds, ZAPF said:
“Industry and the Government must try their best to contain the negative effects of the volatile economy. It would not be fair to let the market go through another inquiry into what went wrong and how pensions evaporated.”
The Government and industry, led by the Insurance and Pension Fund Commission, are still working on a compensation plan for the value loss that occurred during that period.
leeroy
Online Reporter