SEPARATION of assets by pension funds and insurance companies has been identified as a key pillar in unlocking value for pensioners as it has become difficult to effect compensations on monetary asset losses in the face of hyperinflation.
Currently the industry’s investment portfolio comprises 40% properties and 30% equities.While there have been arguments on value erosion on the monetary asset, the regulator says, the loss of value being sought should be strictly on monetary assets. This is because there are properties and equities that can be revalued and revaluation gains to be redistributed to pensioners.
Insurance and Pensions Commission (Ipec) commissioner Grace Muradzikwa this week told a 2020 journalist mentorship programme that asset separation paves way for asset revaluation to realise rightful gains to distribute to pensioners.
She added that there have been a number of cases where one could not tell whether assets belonged to policyholders or shareholders. This, Muradzikwa said, is a situation attributed to a number of major challenges the industry is facing.
She said there has been constant lack of separation of policyholders’ assets and shareholders’ assets in equities and properties investments, short-changing pensioners at the end.
There are also arguments that inconsistencies in timing and methodologies of asset management valuations used by pension funds and insurers have been contributing to the poor benefits paid out by most funds.
In light of this, Ipec this year rolled out guidelines that seek to provide standards to be adhered to by the industry on treatment of revaluation gains emanating from the currency reforms.
The guidelines are also aimed at enhancing uniformity and comparability of industry results on treatment of revaluation gains.
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 and option pricing models.
“Valuation of properties, is an area where we have also been liaising not only with Actuarial Society of Zimbabwe, but also the Valuers Council of Zimbabwe, so we can reach an understanding on valuation guidelines. And also, where pension funds use different methods, we have to ensure consistency in valuation. It is an area that is currently under our microscope,” Muradzikwa said.
“The common goal is that pensioners get reasonable pension values. That is what we are using for asset separation so that you have your property assets and you have equities assets. It’s a statutory requirement that there should be separation of assets. If it was clear we would not be having some of the issues we are having now. We issued revaluation guidelines at the beginning of this year, which are going to force all pension funds to revalue their surviving assets and redistribute those gains to pensioners.”
This is coming at a time the industry is faced with low uptake of insurance products and products which indicate that revenues are suppressed. However, policyholders are valuing their assets in line with inflation.
A financial analyst George Nhepera told businessdigest that it was best to separate assets, giving the opportunity for members to be at least rewarded from gains earned from properties that appreciate in value during periods of inflation.
“During hyperinflation periods, properties tend to gain value far much better than equities, which usually become subject to volatile and unstable market risks. Without separation of the two, the ultimate value or returns will not be fully captured to then deliver value to pensioners” he said.
An insurance consultant Tafadzwanashe Zinyoro agreed that asset separation is key to able to revalue assets appropriately for the benefit of pensioners.
“To be precise, separation of assets is meant to protect members of pension funds that have been contributed the longest to the fund,” Zinyoro said.
“Without the separation, old members would be prejudiced while new members would benefit from the assets acquired by old members. So, the separation is done to ensure that there is equity. If you look at the conversion from Zimdollar to US dollar that was done by pension funds and life insurance when Zimbabwe adopted the multi-currency system, old members of pension funds were prejudiced because there was no separation of assets. This was noted in the Justice Smith Commission of Enquiry.”
While the commission has been enforcing asset separation pertaining to pension funds and insurance companies as a strict enforcement on compliance, it is expected to bring down the number of cases where there is no clear line in terms of ownership of assets.Should insurance and pensions entities comply, this could bring a new era to better pension benefits.