IPEC moves to combat pension fund failure

Kudzanai Sharara

The Insurance and Pension Commission (IPEC) has come up with guidelines that can be used by “troubled” pension funds and pension administrators to ensure adequate protection of the benefits, rights and interests of pension and provident fund members.

Key indicators for a fund or administrator to be deemed a troubled institution, include where the key ratios in terms of solvency, asset quality, profitability and liquidity are deteriorating.

This also includes funds with participating employers who have not been remitting contributions to the pension funds within the 14 days prescribed in the Pension and Provident Funds Regulations S.I 323 of 1991 and those that have already accrued contribution arrears for a period of six months or more.

Failure to remit contributions deducted from pension fund members’ salaries to their retirement funds is a systemic problem, which over the years has prejudiced members in terms of the final benefit payable upon exit from service. According to IPEC contribution arrears closed the year 2019 above $600 million.

Regulated entities upon which penalties for non-compliance have been imposed by IPEC or any other regulatory board for two or more consecutive periods and those which are in an unsound financial condition owing to funding levels falling below 75 percent after discounting contribution arrears from assets, are also deemed as troubled.

The insurance and pensions regulatory body said it had to come up with the guidelines after noticing inadequacies in the procedures employed by the pension industry to resolve troubled pension and provident funds; and fund administrators.

In a circular to industry players, signed by commissioner Grace Muradzikwa, IPEC said the identified inadequacies were now resulting in affected entities continuing to operate even where the condition of the fund or fund administrator is such that the entity is in an unsound condition which otherwise calls for its dissolution.

“Where corrective action can be implemented, lack of guidance and knowledge on the processes and procedures to be followed often prolong the implementation of the corrective action,” said IPEC.

In some cases, this has resulted in the condition of the entity deteriorating to an extent where the entity can no longer be restored to a sound condition, it added.

“The above results in financial prejudice to members of pension and provident funds, who in most cases lose out on their lifetime savings as the funds fail to pay the expected or promised benefit.”

The guidelines, which are applicable with immediate effect, are expected to cover key indicators for a fund to be deemed a troubled institution, procedures to be followed where regulated entity is classifiable as a troubled institution, funds administrator who fail to meet the minimum capital requirements, entities administered without a properly constituted board among other areas of concern.

The guidelines also include additional action that may be taken by a regulated entity after becoming aware of its own troubled state.

The guidelines also “lay out the conditions and circumstances under which IPEC will intervene and the preventative, protective or punitive actions that IPEC can take to resolve the troubled condition of the institution.”

Where a regulated entity is classified as a troubled institution, the reason should be clearly defined and should be brought to the attention of IPEC within seven days from the date on which the fund or fund administrator becomes aware of this state.

The notification should be accompanied by a proposed plan for restoring the fund or fund administrator into a sound condition.

If the problem persists or cannot be easily corrected or can cause irreparable harm to fund members, IPEC reserves the right to take action including onsite inspection, investigation, direct the dissolution of the fund or cancel the certificate of registration of the fund administrator.

Observers say IPEC’s move to provide guidelines is what is expected from a regulator if the country is to prevent a repeat of what happened post dollarisation when pension values where allegedly decimated.

A report by the Commission of Inquiry appointed to look into the conversion of insurance and pension values from the Zimbabwe dollar to the US dollar blamed IPEC for its failure “to initiate and champion measures to protect policyholders and pension fund member values and then, in consultation with Government, provide guidance to the industry during the periods of inflation, when the ZW$ currency was debased in 2006, 2008 and 2009 and at the time of conversion.

“IPEC failed in this role, resulting in the industry having to rely on its own tools and policies to convert, which conversion was prejudicial to the pensioners, pension fund members and insurance policyholders” reads the Report.

Poor governance at IPEC such as absence of proactive risk-based supervision and on-site inspections; failure to protect consumers with respect to institutions that were wound up; failure to provide guidance on actuarial, accounting, auditing and investment management practices, were also cited as the reasons why pensioners ended up losing value.