Sundaymail Editor
Tawanda Musarurwa
With just 4,2 percent of occupational pension funds in Zimbabwe utilising the defined benefit (DB) scheme, the future of many current employees may be at risk given the significant limitations of the increasingly popular defined contribution (DC) schemes.
While DB schemes guarantee a specific income at retirement, DC schemes factor in an employee’s contributions and the performance of the pension fund’s investment.
But another key difference is that DB schemes are largely funded by employers, while the funding burden for DC schemes falls to employees.
So it’s not unexpected that most companies in the country (and even across the globe) have shifted to the DC model.
Insurance and Pensions Commission (IPEC) Dr Grace Muradzikwa says the shift is understandable, but their preference would be for the DB model.
“Only 41 out of the 971 pensions funds are now defined benefit scheme. We have seen a movement from defined benefit funds because sponsoring employers were also facing viability challenges. They would have to cover the funding gap.
“The Commission would obviously prefer a defined benefit arrangement which guarantees benefits to pension scheme members, but we are also alive to some of the challenges around defined benefit schemes,” she told a journalists mentorship programme recently.
The DC scheme is not bad per se, but to the extent that the success of a particular fund is dependent on its investment performance, inflationary pressures in the local environment has meant that some investment outcomes have been sub-par.
Pension funds that are heavily invested in the money market, for example, are particularly exposed.
As a result of sub-inflation interest rates, money market assets in the country have generally lost value over time.
In the recent Mid-Term Monetary Policy Statement, the Reserve Bank of Zimbabwe (RBZ) maintained the overnight accommodation rate at 40 percent and the medium-term lending rate for the productive sector at 30 percent in a move aimed at curtailing speculative borrowing.
The central bank also kept an interest rate cap on the medium-term lending facility at 10 percent.
Among other things, the interest rate is significant insofar as it impacts the total return on numerous types of investments.
Observers say the combined impact of inflationary pressures and capped interest rates has contributed to the underperformance of pension funds’ investment portfolios.
“From the way inflation has been in Zimbabwe, inflation risk has been the major factor affecting DC plans. The salaries and wages of employees have not been increasing in line with inflation as companies have been struggling to stay afloat.
“This has seen an impact on the replacement ratios. This might result in the contributions being made failing to provide an adequate retirement income stream,” said Zimbabwe Association of Pension Funds (ZAPF) director-general Sandra Musevenzo.
“Given that there is no guaranteed income upon retirement in the DC scheme, the annuities market was being used to curb this problem but of late, the annuities market has been affected by inflation resulting in the Insurance and Pensions Commission (IPEC) changing the minimum monthly pension benefits and the level pension benefits were affected by the inflation.
“Inflation erodes real value so the percentage that is being put towards savings also dwindles. However, ignoring inflation – we are not saving enough as individuals such that at retirement income from occupational DC pension schemes would not be enough.”
Although, in theory at least, the DC scheme can work as a cheaper alternative (for both employees and employers) to delivering retirement benefits it inherently takes on too much risk.
Actuaries Gandy Gandidzanwa and Itai Mukadira at Risk and Investment Management Consulting Actuaries (RIMCA) have proposed a hybrid model that benefits from both the DC and the DB systems.
“That only a proportion, very close to 0 percent, can afford to retire comfortably after having diligently and loyally gone through our current DC regime is a clear testimony of the inappropriateness of the model for the job at hand. It’s a result of a structural and design problem as much as it is a result of the prevailing economic situation,” said the experts.
“Contrary to the current system of tax-deductible retirement savings contributions, the proposed framework would use flat tax credits for lower income earners instead.
“This is to ensure that the tax system is wealth redistributive and is a benefit to those that really need it.
“Upon retirement, the accumulated reserve is annuitised to provide a guaranteed income for life. With a nationwide centralised pooling system, expenses will be thinly spread due to size and economies of scale.”
Online Reporter