Economic turmoil robs pensioners once again

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CUTTING-EDGE INTERVIEW: Melody Chikono

IN excess of $30 million lies unclaimed by more than 50 000 pension beneficiaries largely due to a lack of information about the existence of the funds. The pension industry is yet to recover from legacy issues dating back to 2009, policy-induced turmoil and the continued erosion of value, among a myriad of challenges. Business reporter Melody Chikono (MC) spoke to the chairperson of the Zimbabwe Association of Pension Funds (ZAPF), Reginald Chihota (RC), ahead of ZAPF’s 44th annual conference (themed Retirement Savings in an Uncertain Economic Environment), scheduled for mid-May, to understand the challenges and opportunities of the pension industry in Zimbabwe in the face of a struggling economy. Find excerpts below:

MC: What is your comment on the pension fund industry in Zimbabwe in relation to the prevailing economic situation?

RG: The industry is certainly facing a myriad of challenges which are mostly to do with preservation of value. The prevailing fear is that for the second time within a decade there is grave danger that another massive erosion of value is imminent or already in progress. This is naturally leading to a crisis of confidence in the efficiency of pension funds as trusted vehicles for retirement savings.

MC: What are the long-term problems that you continue facing as an association?

RC: The challenges mostly hinge around the need to best align the expectations of our membership to, among other things, the amendments the proposed new Act, the proposed reforms of the industry and the breadth of the investment universe in which contributions can be invested. You will note that in May we are going to have our AGM and annual conference under the theme “Retirement Savings in an uncertain Economic Environment”. The recent deterioration of the Zimbabwean economy puts the future of Zimbabwean pension funds into question. The introduction of the RTGS dollar (ZWL) as a currency in February 2019 has had a significant impact on the valuation of local pension funds. The objective of the conference is to give the industry the opportunity to interrogate issues concerning their retirement savings in an uncertain economic environment.

MC: Pension funds are also struggling with arrears. What strategies are you putting in place to try and bring down the numbers?

RC: In this regard, we are working closely with the regulator to address the issue of arrears, bearing in mind the underlying causes are not always generic but tend to be industry-specific or company-specific. Targeted engagements by administrators and the regulator are being done with the sponsoring employers to secure commitments and payment plans. In addition, there’s a regulated late payment calculation meant to ensure the policyholders do not suffer prejudice resulting from loss of investment returns.

MC: The industry is also saddled with continued erosion of value owing to the currency crisis in the country. How does the pension industry intend to cushion itself against that?

RC: In this respect, we are lobbying through Ipec (Insurance and Pension Commission) for the implementation of various initiatives that will not only protect accumulated funds but also ensure that, going forward, value is protected. These include instruments like inflation-linked bonds, especially for the prescribed asset category whose compliance ratio was increased on budget announcement from the current 10% to 20% and is compulsory by law.
The other initiative in the pensions and provident funds draft Bill is to allow pension funds to get an offshore exposure for some portions of funds sooner rather than wait for the Bill to take its long and winding process. It is important that this be implemented if we are to achieve to diversify local country risk. Through press reports, we believe RBZ has somehow, on a limited scale, given one or two pension funds, this offshore exposure through investments in some depository receipts which in our opinion should have been extended to the whole industry and allocated on an affordable and need basis. The creation of the FCA nostros and RBZ through its exchange control department should also make it possible for all dividends paid from offshore investments to be paid in foreign currency to all recipients of the payouts. Over the years some offshore dividends have been paid in pension fund accounts already converted at some official exchange rate. The same treatment given to all exporters in the country should also be extended to pension funds whose investments are also bringing in foreign currency and therefore, if possible, get a preferential exchange rate like the gold or tobacco producers are getting. This is the least the authorities can also try to chip in the compensatory equation to address loss of value which started during the hyperinflation period and appears to resurface or has already resurfaced as recent as from October 2018 to date.
It is a starting point and a small gesture in an effort to try and make good of what went wrong, but over time it also makes a huge difference considering the number of shares listed out of Zimbabwe where pension funds have exposure have now increased to five (that is, PPC, Old Mutual, Seed Co, Quilter and Nedbank).

MC: How has the delay in announcing the valuation of pensions from the commission of inquiry affected pension beneficiaries and pension funds?

RC: Ipec was tasked to look into the possible formulation of proposals relating to some form(s) of compensation framework. Understandably, the perceived delay in the resolution of this issue is obviously resulting in a drawn out crisis of expectations but what needs to be appreciated is, given the complexities of issues at play, there was never going to be any easy readily available answers.

MC: I understand the announcement is almost close. What is your comment, considering it is coming at a time the market is confused and there has been further erosion of value?

RC: In my view, it would be premature to comment on a matter under active consideration. One does, however, hope part of the announcement (drawing on lessons learnt) would include recommendations that speak to how funds can be safeguarded to avoid undue loss of value which would require compensation.

MC: What is your outlook in 2019, with specific reference to addressing critical issues in the industry?

RC: Investment risk is high. The biggest concern is the hazard associated with failure to resolve the causes of macro-economic instability, currency devaluation and related
causes of hyper-inflation in Zimbabwe:

  • Lack of confidence in government, economy and political stability;
  • High national debt;
  • Decline in economic output;
  • Decline in export earnings;
  • Price controls which exacerbate shortages; and
  • Expectations of hyperinflation.

MC: What is your comment on the interbank forex trading market and the new currency conundrum unveiled by the RBZ in the February 20 Monetary Policy Statement?
Do you see it effecting the remitting of pensions by companies?

RC: We appreciate the reforms to currency administration and the intention to facilitate the development of a transparent mechanism for pricing foreign currency. However, we have concerns with:

Forex retention frameworks that promote the abuse of forex by entities that generate it.

Forex trades are confined to the interbank market, thus it is the financial institutions that determine the market dynamics — such a situation may have sub-optimal outcomes.

MC: In terms of policy, what policies should government put in place to enable the effective operation of pension funds?

RC: There are a number of initiatives we believe will benefit the industry and increase its ability to support long-term infrastructure capitalisation, for example:

  • Treasury Bills indexing and inflation-proofing are necessary to improve confidence in the value preserving ability of the instruments.
  • Pension funds should be allowed more latitude in asset selections and portfolio construction, and
  • The categorisation of instruments to be conferred prescribed asset ratio status should allow for a broader base of issuers and asset classes.

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