NSSA partial funding model

schemes.
An informed comparison between the pension level paid by these pension schemes and the NSSA scheme would put the issue of low pensions in perspective.
This will be particularly clear as occupational pension schemes receive contributions as high as 22,5 percent of earnings, without any earnings ceiling, while NSSA only receives 6 percent of earnings with an insurable earnings ceiling of only US$200 per month.
Although one of these articles quotes a “pensions expert”, this “expert” seems to have overlooked a number of issues in relation to the manner in which the NSSA pension scheme is structured.
The “expert” appears to be unaware that NSSA produces audited financial statements every year and operates according to specific rules.
Journalists and commentators seem to repeatedly make the mistake of thinking that because NSSA has surplus funds it should be able to increase pensions.
This overlooks the fact that current contributors are contributing towards their own pensions and these funds have to be invested in order to ensure there will be funds available for them when they reach retirement age.
NSSA cannot, as any pensions expert should know, use all the money it is receiving currently to settle pensions. Current surpluses have to be invested.
There are various financing models for social security schemes. One is the Pay-As-You-Go (PAYG) system, where contributions are collected year by year and should match the expected expenditure of the year. There are no reserves to invest. The contribution rate increases annually. 
There is a partial funding model that uses the general average premium contribution rate, which balances the present value of the total expected future benefits minus initial reserves. The rate of contribution in theory stays constant indefinitely.
The other partial funding model is the scaled premium method, where contribution rates are fixed and maintained at a constant level over a defined period. Incomes and expenditure should be in actuarial balance over this period.  The rate of contribution is higher for each subsequent defined equilibrium period. The scaled premium system is the one the NSSA scheme uses.
Partial funding simply implies that part of the contributions made today is invested in a fund.
Pension increases do not happen because the pension fund has recorded a surplus in a particular year.
Any pension increases, for pension schemes in general and in the case of NSSA in particular are recommended by actuaries.
The statutes governing insurance and pension funds in Zimbabwe make actuarial advice mandatory.
Technically speaking, the surplus is not for current pensioners but belongs to current contributors.
It should be invested and grown so that when they retire they receive enhanced pensions and reasonable minimum pensions. 
All NSSA benefit and contribution reforms have been actuarially advised. This includes the redenomination of pensions in United States dollars for pensioners who retired during the Zimbabwe dollar period. The pensions were pegged at US$25 in April 2009.
It was subsequently reviewed upwards to US$40, which is also the current minimum NSSA retirement pension.
The rules governing NSSA and the calculation of NSSA pensions are defined in the NSSA Act Chapter 17.04 of 1989 and the regulations contained in Statutory Instrument 393 of 1993. 
For a defined benefit scheme, if inter-generational equity is to be maintained, one should not tamper with the set rules of the scheme for fear of disadvantaging one generation and over-rewarding another. 
The rules governing calculation of pensions are accessible to all members of the scheme. They have been given in this column on more than one occasion.
The rules are clear because the scheme is a defined benefit scheme. If a contributor could correctly project his or her insurable earnings at retirement, he/she would be able to calculate what his/her pension will be.
The formula used is to multiply the number of contribution years by the pensioner’s insurable earnings on retirement by the laid down accrual factor of 1,333 percent.
The following table shows the percentage of insurable earnings the NSSA pension will replace at retirement, using the NSSA pension rules.
Contribution    Replacement
years    Rate (%)
10    13,3
15    20,0
20    26,7
25    33,3
30    40,0
35    51,7
30    40,0
35    51,7
40    63,3
45    75,0
47    79,7
A person who joined the national pension scheme at inception in October 1994 would have contributed for 17,5 years at the end of March 2012. The applicable replacement rate would be 23,3 percent. The pension of a person who has contributed to the scheme for 30 years would replace 40 percent of his/her insurable earnings.
The only factor that limits the growth of NSSA pensions is the ceiling on insurable earnings, currently pegged at US$200.
Someone who joined the scheme in October 1994 and retires today with actual earnings of US$2 000 will only receive a monthly pension equal to US$200 x 17,5 percent x 1,333, (i.e. US$46,66) because of the ceiling of
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