Pension evaluations riddled with inconsistencies

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Melody Chikono

INCONSISTENCIES in timing and methodologies of asset valuations used by pension funds and insurers are contributing to the poor benefits paid out by most funds amid indications many have deliberately not revalued their assets since December 2018, it has emerged.

Information from the Insurance and Pensions Commission (Ipec) shows that in Q3 2019 total industry assets stood at US$1,4 billion with insurance assets overtaking pension ones.

Traditionally pension assets have always been higher than insurance, but during the period, pension funds’ assets value stood at ZW$9,45 billion compared to ZW$12,9 billion.

Ipec commissioner Grace Muradzikwa told businessdigest on the sidelines of the recent Insurance Institute of Zimbabwe (IIZ) annual conference in Victoria Falls that the regulator was seized with this issue, adding that contributions made and benefits received did not correspond. She attributed this to the methodologies used in valuing assets.

“Valuation inconsistencies in the industry are related to the issue of pension valuations as well that I shared. We now have a situation where the value of assets in the pensions is now less than the value of assets in the short-term insurance industry. The answer I got from pension funds is that they are revaluing assets once a year, but this is fine in a stable environment, but in an environment like we have now we cannot afford to do that. Why are pension funds valuing assets annually and yet reviewing salaries on quarterly basis? Is it fair?” she asked.

Asset valuation is the process of determining the fair market or present value of assets, using book values, absolute valuation models like discounted cashflow analysis, option pricing models or comparables.

This comes as pensioners have been receiving low benefits, which fail to meet reasonable expectations. Muradzikwa recently said it was disheartening to see pensioners and insurers reviewing their salaries on a regular basis to match inflationary levels yet they did not extend the same benefits to contributors.

However, she said Ipec was now issuing guidelines as a step to addressing paltry pension payouts.“We are talking about valuation methodologies that are being used in the industry. We will provide guidelines on valuation methodologies because we want to see consistency in the valuation of assets. It’s quite evident when you just look at the reported value at the third quarter you will realise there is a problem,” she said.

In the third quarter, pension funds’ assets value stood at ZW$9,45 billion compared to ZW$12,9 billion.However, market watchers say the industry has been reluctant when it comes to revaluation of assets due to the awareness that it is entitled to allocate revaluation gains to policyholders and pensioners.

Comparing the difference between the 2017 figures of US$7,2 billion for the whole industry against US$1,4 billion to date implies that the industry lost US$6 billion in this period.

“How is that possible when about 70% of their assets are in equities and property? It doesn’t make sense. They want to steal from pension holders and pension scheme members. The industry should be talking of about ZW$90 billion worth of assets using the interbank rate. But they do not want to put it there as they know it means they should allocate revaluation gains to policy holders and pensions,” a market watcher said.

Pensioners who spoke at the conference said it was very expensive to revalue assets frequently. “We are very aware of the need to revalue our assets as often as possible but you will realise in this environment it comes with costs and is thus very expensive. This is the reason why we are doing it once a year,” one delegate said.

Muradzikwa challenged the industry to relook its high administration expenses that are often used as an excuse for disbursing poor benefits when they fall due.
A commission of inquiry chaired by retired judge Justice George Smith described expenses as “predatory, cannibalistic” and the biggest cause of loss of value from 2009 to 2015.

Should the industry handle its expenses as well as use the guidelines, industry experts say there is a chance it will realise value that will enable it to revisit and alleviate the pensioners’ plight.

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