THE year 2009 was a gloomy time for pensioners and insurance clients alike as the removal of 25 zeros through currency debasing saw pension funds and insurance companies technically extinguishing their obligations to policyholders and pensioners without any actual payments being made.
A decade later, the pension industry is still reeling in the aftermath of the hyperinflationary era, grappling with low confidence levels, as the public now views pensions as a massive racket designed to rip off workers.
At a time the Insurance and Pensions Commission (Ipec) is working on finalising conversions to US dollars in line with recommendations of a commission of inquiry, the country in February woke up to another new currency regime which saw the removal of the US dollar as the base currency and its replacement by the RTGS dollar.
Various sections of the economy were left dazed by the currency conundrum, but the pension industry — already saddled with legacy issues from the hyperinflationary era — is yet to recover, a situation which, if not handled well, will see the industry counting further losses.
With confidence levels in the pension sector hitting rock bottom, Ipec head of pensions Josphat Kakwere recently told businessdigest that while there is definitely going to be a revaluation or re-pricing of assets, there should be a corresponding revaluation of liabilities in order to avoid conversion-related losses.
According to the commission of inquiry, assets that were supporting insurance and pension liabilities were transferred to shareholders of insurance companies or became surpluses in some defined contribution pension funds.
The exchange rate of US$1 to Z$35 quadrillion, which was used when the Zimbabwean dollar was demonetised in 2015, prejudiced insurance policyholders and pensioners as it reduced the already worthless ZW$ currency values that had been deposited in individual bank accounts to just a few US cents or to a maximum of US$5.
A decade later, the pension industry, among other woes, is saddled with a total of $30 million in unclaimed pensions, which will definitely have to be revaluated to suit the new currency regime. According to Ipec, this has been caused largely due to a lack of information about the existence of the funds.
While pension funds are expected to honour such obligations at one point, they are struggling with high contribution arrears in excess of $600 million against a retirement fund value of $5 billion.
Speaking to business digest on the sidelines of the third annual Insurance and Pensions Journalist Mentorship Programme in Harare, Kakwere said the only way for pensions to work is for the public to view it as a long term instrument, rather than short term.
Kakwere said apart from the low confidence levels, the industry is also grappling with fragmented regulation, poor corporate governance, foreign currency shortage and high expense ratios for some pension funds.
In line with this, he said Ipec in consultation with the government and industry stakeholders is developing new guideline for valuation of liabilities in line with asset revaluation necessitated by the February 20 Monetary Policy Statement.
The objective is to develop a standardised way of treating assets and liabilities in a way that ensures fairness and value preservation for all parties in an insurance or pension contract as the last quarter of 2018 witnessed a deterioration of macro-economic fundamentals, which had an adverse impact on insurance and pensions.
“What’s important is to look at things and say, yes, assets are going to revalued, so we want to see a situation where there will be corresponding revaluation of liabilities so as to avoid loss mainly because of the conversions.
“We have lessons learnt from the 2009 position and commission of inquiry report which we are looking at. We will be providing guidelines to the industry soon. As things are not stable at the moment we should apply the lessons learnt from the past.”
The reduction in asset values during the period prior to 2008 was largely attributed to misappropriation of assets and excessive expense structures as opposed to hyperinflation.
While noting that there were low valued which actually prompted government to institute investigation into the conversion from zimdollars to us dollars Kakwere said people are now asking its really worth the to put money into pensions.
“Hyperinflation is an event which is said to happen once in 2000 years. So when you want to look at it from a short-term perspective you may say yes pensions do not work. We need to be of long-term view and apply a cautious approach into the future. Pensions still matter as long as you will get old, but the issue of confidence is not one we can get over the night. We need more financial education awareness campaigns so that people can see there is a better side to pensions than what’s on the ground,” he said.
The commission of inquiry attributed the erosion of policy values to three broad factors: macro, mezzo and micro levels, making the quantification of losses quite subjective.