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Martin Tarusenga
In the wake of what appears to pensioners and members of pension funds, to be a widespread unabated abuse of rights from pension and insurance contracts by insurance companies, questions are being paused: what exactly should be done to guarantee such rights, and to secure the rights in the event the insurance company has dishonoured, fraudulently or otherwise. And against a background where these same pensioners and pension fund members are facing abuse at similar scales, of rights from contracts with banks and related institutions, similar questions are being paused.
At the level of the service provider institution such as an insurance company, rights are guaranteed by explicit pension and insurance contracts between the insurance company and the subscribing member, as equal partners to the contract. Among other things, the contract categorically guarantees stipulated benefits to the subscriber, payable by the insurance company at stipulated points in time, while the subscriber is contracted to pay premiums or contributions at stipulated levels for stipulated time frames.
Under these contracts the insurance company undertakes to regularly advise the subscriber of the state of the contract, and in particular whether it is on target to meet promised benefits.
The annual benefit statements issued by pension and insurance service providers, are in keeping with this latter insurance company contractual undertaking.
Most insurance companies in Zimbabwe have stopped issuing these statements.
In Zimbabwe, Government intention was, and is to guarantee rights from pension and insurance contracts primarily through the Pension and Provident Fund Act, the Insurance Act and the Insurance and Pension Commission (IPEC) Act. It tasks IPEC to administer the former 3 Acts and guarantee pension and insurance rights. In turn, such laws typically guarantee the rights by requiring insurance companies to maintain money reserves adequate to meet benefits promised to subscribers, and additional buffer money reserves to provide extra certainty to delivery of full rights in the event of both expected and unexpected events. Such reserves are referred to as mathematical reserves and (insurance) capital requirements.
This publication has reported how regulations such as Solvency II, Institutions for Occupational Retirement Provisions (IORPS) in Europe and others, thus structured, constitute best practices in pension/insurance regulation, and how Zimbabwe’s pension/insurance legislation fall far short of such legislative structures, and practices. Government cannot guarantee pension and insurance rights with such a weak pension and insurance legislative framework – hence the current pensioner outcry.
Recent reports that IPEC set new actuarial standards in pension and insurance regulations, requiring each actuarial valuation report to be accompanied by an appendix highlighting salient issues contained in the report, still renders the regulations ineffective without explicit comprehensive provisions for such “salient features” in the main pensions/insurance legislative framework.
Without the requisite skill at IPEC, as it has become abundantly clear, and without comprehensively providing for the features in the main legislative framework, there is nothing to stop the same actuarial personnel who misled the industry, into highlighting inconsequential features, if at all they do highlight.
While the Finance Minister has promised an inquiry to probe into rights abuses and into the loopholes used in the abuses, and to revamp the legislation thereof, public questions are being asked about the commitment to protecting rights given the time it is taking for the inquiry to start.
Rights due from banks for these same subscribers, threatened with similar institutional abuse should be guaranteed at institutional level similarly via the contracts.
Government guarantees such rights through the Reserve Bank of Zimbabwe (RBZ) Act, as administered by the RBZ (the Central Bank). Laws guaranteeing such rights also similarly require banks to maintain minimum capital levels and appropriate provisions, that ensure that bank account holders can be paid as and when contractually called to do so.
The minimum capital level that a given bank should hold, however directly depends on how this bank utilises the funds entrusted to it by depositors. In this latter regard, banks traditionally make their money by lending (on-lending) money pooled from its depositors, in such a way they can still honour withdrawals by the depositors.
The central bank’s task in guaranteeing depositors’ rights is to ensure that banks do not on-lend recklessly, in a way that may cause them to fail to honour withdrawals by depositors. Bank regulatory frameworks such as Basel III therefore require minimum capital to be maintained by a given bank to be a stipulated fraction of the loans that the bank advances to its borrowers, and from depositors’ funds.
Such regulations require each loan to an individual, an institution, or other to be quantified by loading the loan with a risk factor representing the risk of default characteristic of the borrower. Therefore a bank advancing large loans to borrowers with high risk of default, for instance, may find itself with capital levels unacceptably low to its central bank.
For this reason central banks and banks overall will rely on credit reference bureaus and other reputable credit reference agencies for evaluations of risk factors associated with various borrowers.
The huge non-performing loans (NPLs) reported by the Finance Minister and the RBZ in their budget statements and monetary policy statements, respectively, suggest a weak bank regulatory framework that cannot protect bank rights.
Unfortunately the banks precipitating the NPLs now have to be bailed out by the tax payer, as Government bonds have to be invoked to avoid failure of these banks. The RBZ reports that it is setting the requisite credit reference bureaus and implementing Basel III continue to be statements that are not amenable to verification.
Government should do more to protect pension and bank rights.
Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected]; telephone; +263 (0)4 883057; Mobile; +263 (0)772 889 716
Opinions expressed herein are those of the author and do not represent those of the organisations that the author represents
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