tawandamusarurwa
. . . Govt has already put US$175m on the table
Tawanda Musarurwa
Pensioners and policyholders — whose Zimbabwe dollar-denominated lifesavings and policies went up in smoke after the currency changeover in February 2009 — might finally be compensated for their losses this year, as pension funds and insurance entities have begun computations and “relevant preparations” to make the much-awaited payouts.
The Insurance and Pensions Commission (IPEC), which is the industry regulator, recently issued Circular 5 of 2023 to expedite the process, once drafting of the pre-2009 compensation regulations is complete.
According to the guidelines, pension funds and insurance companies are expected to submit their compensation schemes 90 days from the date the regulations become operational.
IPEC would have to approve compensation schemes within 30 days of submission, after which payments would be effected within 30 days of approval.
The draft regulations have since been lodged with the Attorney-General’s Office and now await gazetting.
“This will aid the smooth implementation process and adherence to timelines in the proposed regulations,” said IPEC Commissioner Dr Grace Muradzikwa in the circular dated February 17, 2023.
“The regulations are now at an advanced stage of conclusion.”
The hyperinflationary environment leading up to 2009, where the annual inflation rate peaked at 236 million percent by September 2008 (when the Zimbabwe National Statistics Agency discounted reporting annual inflation), destroyed the value of the Zimbabwe dollar, forcing Government to abandon it in February 2009.
A basket of foreign currencies — the multi-currency system — was adopted, bringing instant stability. However, the transition condemned pensioners and policyholders, whose assets were mainly denominated in the local unit.
To protect pensioners and restore the integrity of the insurance and pensions industry, Government swore in an eight-member commission led by retired High Court judge Justice George Smith on August 19, 2015 to inquire into the conversion of insurance and pension values from the Zimbabwe dollar to the US dollar.
Its other members were Dr Godfrey Kanyenze, Mr Anesu Daka, Mr Martin Tarusenga, Mr Brains Muchemwa, Mr Itai Walter Chirume, Mrs Violet Mutandwa, Mr Tapiwa Maswera, Mr George Dikinya and Mr Cuthbert Tafirei Munjoma (secretary).
The commissioners had to comb through data from more than 20 insurance firms, 15 brokerages, self-administered pension funds, the Public Service Pension Fund, the National Social Security Authority (NSSA) Pension Fund and other benefits schemes.
It was the commission’s finding that poor regulatory enforcement and change in currency were to blame for the value erosion.
While it was agreed that the pensioners and policyholders that were prejudiced had to be compensated, it has been an agonising 14-year wait for some.
But there are indications they could start getting their dues by year-end.
The Zimbabwe Association of Pension Funds director-general, Mrs Sandra Musevenzo, confirmed they had commenced the computations.
“As per Circular 5 of 2023, yes, they are working on the draft computations,” she said.
Capacity to pay
Encouragingly, Government has already seeded US$175 million to complement the pool of funds that will be used to compensate pensioners and policyholders for the pre-2009 losses.
“Government (has) committed a supplementary US$175 million towards compensation for the pre-2009 loss of value,” said Finance and Economic Development Minister Professor Mthuli Ncube when he unveiled the funding on July 22 last year.
“We will be working with IPEC to come up with the necessary modalities on how these funds will be utilised.
“I am, therefore, challenging you as an industry to do your part and account to your policyholders and pension fund members on how you managed their assets and liabilities, and compensate them in line with the guidance that will be provided by IPEC.”
But the question that arises is whether the sector would be able to meet the envisaged substantial obligations.
Mr Gandy Gandidzanwa — the chief strategy officer at Fundcraft, a Luxembourg-headquartered boutique fund manager — said pension funds and insurance companies would have to use money from current active members “to subsidise the prior generation members”.
“That is an exercise which could benefit more the service providers that will be doing the work rather than the members themselves.
“Current active members will have to subsidise the prior generation members, as the 10 percent will have to come off their returns. This is because there is no fund with such huge reserves earmarked for compensation,” Mr Gandidzanwa, who is also an actuary, told The Sunday Mail.
“The South African surplus apportionment for members who lost out on mass conversions from defined benefit schemes to defined contribution schemes is a case in point.
“Service providers made a fortune but targeted members picked up the peanuts.”
It is believed liquidity levels in the sector cannot possibly cover compensation for all those who were affected.
The liquidity levels in the life assurance sector, for example, are not at ideal positions.
According to IPEC’s life assurance report for the third quarter to September 2022, the life assurance sector’s average current ratio was 29 percent, indicating insufficient liquidity to cover short-term contractual obligations as they fall due.
Also, as at December 31, 2002, the pensions sector had assets worth $1,11 trillion, of which $977 billion was tied up in investment property and quoted equities.
IPEC, however, believes various options will be considered to ensure the industry meets its obligations.
“Indeed, the exposure (for the pensions sector) in investment property is significant, as it averaged 44 percent in the fourth quarter of 2022, though some funds have direct exposure to property to the tune of over 70 percent,” said Dr Muradzikwa.
“For the purposes of facilitating compensation, the following options will be considered: 1) for funds or insures with exposure to listed properties, it will be easy since the properties are already unitised; 2) unitisation of direct property holdings through REITS (real estate investment trusts) or collective investments schemes; and 3) outright disposal of properties where partial disposal is appropriate.”
But there are also fears of a build-up in unclaimed funds once the payouts begin, as some pensioners are believed to have died in the last 14 years while waiting to be compensated.
“If they died before the cut-off date, then they would be excluded by design; but if they died afterwards, the regulator could choose to trace their relatives, and that can also become messy, with funds remaining with huge volumes of unclaimed reserves,” said Mr Gandidzanwa.
Legal experts, however, opine that it would be necessary to be guided by rules of each pension fund on how to treat such benefits.
Bane of Zimdollar collapse
Most of the challenges faced by policyholders and pensioners can be attributed to the collapse of the Zimbabwe dollar in 2019, after close to a decade of economic sanctions from the United States, the United Kingdom and the European Union.
The unilateral coercive measures made it difficult for the country to get balance of payments support from international financiers, a situation that undermined the value of the local unit.
At the same time, the private sector could not access cheap funds owing to the decline in direct correspondent banking relationships, as well as the risk premium attached to Zimbabwe.
The Zimbabwe dollar was eventually demonetised between June and September 2015, with the central bank paying a flat US$5 for bank account holders that had balances of zero to $175 quadrillion as at December 31, 2008.
However, pensioners and policyholders lost out.
This episode eroded the public’s trust in financial institutions, pension funds and insurance companies.
With regard to insurance, in exchange for a premium, a company agrees to cover a policyholder for a specified loss, damage, illness or death caused by an unexpected event (which may or may not happen).
However, a pension plan typically spans an individual’s entire working life.
Worryingly, latest official figures show that the country’s insurance penetration level stands at a paltry 1,9 percent.
Long-term remedies
The Justice Smith Commission came to the conclusion that “there was a huge loss of value to insurance policyholders and pensioners owing to failure by Government, the Insurance and Pensions Commission and the industry to set up a fair and equitable process of converting insurance and pension values from Zimbabwe dollars to United States dollars”.
Government policies, poor regulation and the industry players themselves also reportedly contributed to the loss.
Legal practitioner Mr Nobert Phiri said the commission of inquiry report was meant to restore the integrity of the country’s insurance and pension industry, as well as buttress social protection.
“The capacity to meet (pension) promises is one of the most important issues in the design of retirement systems,” he told The Sunday Mail.
“The adoption of the Constitution of Zimbabwe Amendment (No. 20) Act 2013 and the Justice Smith Commission of Inquiry of 2017 has brought with it changes, and will continue to have an enormous impact on the pensions industry.”
IPEC has been trying to plug regulatory loopholes in the industry.
In 2021, Cabinet approved amendments to the Insurance and Provident Fund Bill and the Insurance and Pensions Commission Bill.
The resultant Pension and Provident Funds Act (24:32) — which was promulgated in September 2022 — is expected to foster better corporate governance practices within the industry, while adequately providing the legal basis for a troubled entities’ resolution framework, as well as widening IPEC’s enforcement powers.
Among other key functions, the Insurance and Pensions Commission (Amendment) Bill empowers IPEC to ensure compensation is paid to beneficiaries for losses they may incur.
It also empowers the regulator to determine the level of such compensation, based on the different classes of insurance policies or type of pension or provident fund.
A sound future
Experts believe people will always want to save for a rainy day.
However, to assure people that they will get their money back as promised, policies, laws and regulatory institutions and the insurance industry itself should be well-structured and aligned.
In terms of the local pensions industry, NSSA was created to complement occupational pension funds.
However, in recent years, there has been a significant decline in occupational pension funds, from 1 100 two years ago to the current 981.
To make matters worse, information from IPEC shows that, of the existing 981 occupational funds, only 504 are currently active, with a total membership of 932 263.
The continued regulatory and institutional strengthening is aimed at eliminating all systemic inadequacies.
There are proposals for the country to consider using an integrated three-tier pension system, which is meant to improve adequacy and coverage of pensions, promote the co-existence of the national pension administered by NSSA and the privately administered occupational schemes, as well as enhance collection of contributions.
The three-tier system is derived from pension reforms adopted in Ghana.
In essence, the first tier will be the current compulsory scheme under the administration of NSSA. The proposed second tier of the pension system would be defined contribution pension schemes that are privately managed and have a component of mandatory contributions up to a certain level for all formally employed workers, who will also be contributing to NSSA.
The proposed third tier is particularly significant in Zimbabwe’s present economic landscape, as it is meant to be voluntary and be able to cater for the informal sector, and even those in the formal sector requiring supplementary retirement income over and above that which can accrue from tiers 1 and 2.
Zimbabwe’s informal sector is among the largest in the Sub-Saharan African region, contributing between 40 and 50 percent to gross domestic product.
Tinaye Agere
Online Reporter