Golden age of pension funds disappearing

By Evonia Muzondo and Oscar Diura

PENSION funds, both private and public are among the largest institutional investors in global financial markets.

They help individuals save for their retirement  and are expected to protect the value of their pensions.

The Zimbabwe pension fund industry is emerging from a low base after years of hyperinflation. Low industry capacity utilisation resulting from limited access to lines of credit and unsustainable interest rates on loans being offered by the banking sector has impacted negatively on companies‘ ability to make contributions to pension funds.

This has stifled investment options and the ability of the pension funds to meet their monthly obligations to pensioners, provide meaningful income returns on retirement and hence clearly losing the essence of their core function.

This situation is not unique to Zimbabwe, even globally returns and payouts on pension funds have been dwindling. Poor returns from pension funds and  very small tax incentives have created an environment where saving for retirement is becoming less and less appealing.

According to a leading corporate accountancy firm in the UK, a pension pot of £100 000 will create annual annuity payments of £7 000 a year — which is £2 000 less than in the year 2000.

However those who had invested money in savings accounts have in the same period done much better, with the account on average growing at twice the rate of the average pension scheme between January 2000 and December 2009. Major volatility in equity markets has been blamed for this.

Pension funds operate in an environment characterised by a number of serious market imperfections such as malfunctioning labour markets and adverse conditions in the economy, which might lead to a fall in asset prices and earnings, making portfolio management increasingly difficult. High unemployment means less contributions leading to less dollars to cater for the old, retired people.

Government interference and sometimes poor financial education of investment managers which adversely affect the allocation of savings and portfolio management decisions — are some of the factors.

During the past decade local pension funds seeing the risk of inflation rising rapidly decided to move from a defined benefit plan to a defined contribution plan in order to remove the increasing risk from themselves. So effectively, what pensioners put in is now what they get out.

The current liquidity crisis in the country has meant that most pension funds have been unable to make pension payouts in foreign currency or are taking longer to pay. Or, in cases where payments are made, they have been inadequate to meet the pensioners’ basic needs.

The National Social  Security Authority (NSSA) pays out a minimum of US$25 per month whilst thePoverty Datum Line is  approximately US$500. Years of hard earned contributions have been made worthless and rendered the pensioner poor.

Even though premiums are now being paid in US dollars, the liquidity situation has not improved two years after the adoption of multiple currencies. Monthly remittances from pension deductions from both the public and private sectors have dwindled. Companies are battling to raise enough cash for salaries, with some paying allowances.

The pension deductions on pay slips are sometimes technical with no forward remittances to the pension fund. Threats from NSSA have not deterred some companies from continuing the practice.

In the Herald of January 17 2011, the Local Authorities Pension Fund issued a notice to its clients informing them that it would not be able to meet its obligations to pensioners  every month. The same situation could also be the case with other pension funds.

Most of them had invested heavily in equities and property in order to preserve value during hyperinflation that wiped out the hard earned Zimbabwe dollar savings of pensioners. These investments suffered a significant decline in value after the economy dollarised. Value of properties fell by an average of 50% and stock prices on the ZSE were subdued as the number of sellers outweighed buyers.

Equity investments  take longer to cash in, provided there is a buyer, increasing the turnaround time from deal execution to receipt of funds.

Then there is also the erosion of tradable investments and lack of investment options on the local capital markets. Government legislation that prohibits pension funds from investing offshore also stifles portfolio growth.

The local bourse is struggling to tick owing to liquidity challenges and investor anxiety over a number of policy issues.

In 2010 the Zimbabwe Stock Exchange was relatively flat meaning a number of portfolios remained stagnant. Offshore investment could be allowed in order to diversify the funds portfolios and reduce country risk. The amount invested offshore may be limited to a percentage to avoid concentration risk.

Rental incomes from property portfolios have not been significant.

There have been high default rates by sitting tenants since the economy dollarised.

A lot of tenants are streamlining or closing businesses. There is therefore much unoccupied space in the city due to high rentals as tenants opt for office parks where rentals are slightly lower.

This would not have been the case had pension funds been allowed to diversify portfolio funds offshore thereby reducing funds’ huge weighting on local real estate.

Prescribed asset requirements were a contentious issue even before dollarisation. Pension funds were compelled to invest in money market instruments that quickly lost value.

The proposal by government to re- introduce compulsory prescribed asset ratios should be shelved until there is  economic improvement and renewed confidence in the sector. Insurance and pension funds are required by law to hold at least 30% of their assets in local registered securities, loans guaranteed by the state or loans to local authorities approved by the commissioner of insurances.

There are no  financial instruments on the market to justify the enforcement of the requirement.

The government, in consultation with industry players, should agree on the levels of prescription, which at 30% is somewhat high for an environment characterised by low liquidity levels.

Asset yields and tenure should also be attractive and take into account the need to have a constant cash buffer to meet monthly obligations.