BY FIDELITY MHLANGA
ZIMBABWE’S pension sector has been ravaged by problems, including chronic inflation, currency volatilities and policy changes. Our business reporter Fidelity Mhlanga (FM) this week spoke to Zimbabwe Association of Pension Funds director-general Sandra Musevenzo (SM) to hear how she has navigated the terrain. Below are excerpts of the interview:
FM: Tell us about the state of pension funds?
SM: In any inflationary economy, the pensions industry tends to be the most affected. You promise members certain pay-outs, which end up being eroded by inflation.
In Zimbabwe, we have not been spared, moreso coming after a serious erosion of value during the 2007/2008 hyperinflationary era. This has resulted in the public losing trust in pension schemes. To protect value, the industry has been adjusting investment strategies to focus on assets that protect value against inflation.
As a result, the industry is heavily invested in equities at 42%, property 37% and fixed income securities at 11%.
The balance is invested in other alternative investments. You will note the growing exposure in alternative investments as one way to hedge against inflation but in the process, the industry has also contributed to infrastructure development in the country.
FM: What is the structure of pension funds in Zimbabwe?
SM: There are more defined contribution (DC) schemes, a few defined benefit (DB) schemes and hybrid schemes, which are a blend of DC and DB schemes. Defined contribution schemes, unlike defined benefit schemes, do not guarantee the benefit that the member will enjoy on retirement hence rely a lot on good investment performance.
FM: How many pension funds do we have in Zimbabwe and do you see plans to merge them as ideal?
SM: There are a total of 614 active pension funds, being stand-alone funds, self-administered funds and insured funds. There has been talks by the regulator, Ipec, to merge the small funds and form an umbrella fund. Of course, this is a decision to be made by each pension fund but some of the benefits of merging include reducing operational costs and leveraging on economies of scale.
FM: What are the sticky issues affecting the pension sector?
SM: Lack of confidence in pension savings. There has been a pension savings gap. The existing levels of pension savings are insufficient to achieve the pension objective of mudya ndigere. This gap is currently being witnessed by the majority of retired Zimbabweans who do not have the financial means to live out their years in moderate comfort with sufficient access to healthcare and other essential services. A weak economy is an economy in which growth is slow-to-negligible in macroeconomic terms which then does not promote savings. This may be caused by weak aggregate demand, low consumer confidence, high interest rates, structural issues that constrain economic growth such as ageing population, dominance of low growth industries, presence of predatory local entities or government policies that discourage growth. This will put many people at risk of not being able to save enough for retirement; thereby widening this savings gap.
Compensation to active members is pending as per the Justice Smith Commission’s recommendation.
Volatility on capital markets due to some government policies, for instance, the continued suspension of the Old Mutual Limited and PPC shares from trading on the ZSE.
Some pension funds receiving contributions in US dollars face challenges on which assets to invest in that will protect value in USD without the fear of policy changes or being diluted by local currency.
Tax burden on pensions — Local taxes remain high which becomes very heavy on pensioners. Government should consider reducing the tax burden on those retiring and existing pension funds by increasing the non-taxable amounts in response to the impact the macro-economic challenge has had on pension savings, which will also help in stimulating pension savings.
FM: Treasury has indicated that Ipec will disburse to pensioners a US$400 000 dividend from Kuvimba House. What criteria do you propose?
SM: We think pensioners — who are further split into active principal pensioners, widow/widower, children and deferred pensioners — were the hardest hit by the policy changes and will not have any chance to recover, hence should be considered among the first beneficiaries. Active members may be considered later since the compensation fund is invested in a going concern, which is expected to continue paying dividends in future.
FM: Compensation for those who lost their savings during hyperinflation, as per Justice Smith Commission recommendations has taken too long. Why is it so?
SM: Government through Ipec is still working on the implementation of the commission of inquiry and industry has been roped in to assist. The matter is receiving the necessary attention. As you may appreciate, compensation is a complex issue that requires coming up with proper models for compensation that will not end up prejudicing other members.
FM: What must be done to encourage individuals to invest in pensions?
SM: There is a need to re-build confidence in the long-term savings industry in general, and pensions industry in particular. This requires educating the population on the benefits of a pension.
FM: How has much been lost due to the current hyperinflation?
SM: There is a need to understand that pension funds invest into perpetuity, short-term losses can be crystalised by long-term gains. However, from the second question above, pension funds are heavily invested on the Zimbabwe Stock Exchange, which posted an annual performance of 1 045%, so one would say they actually performed better than inflation thus delivering real value.
FM: Tell us about plans to invest offshore.
SM: Allowing offshore investments helps widen the investment choices available to local pension funds, as diversification is one key pillar of investment success. Further, offshore investments may help cushion the funds in the event of a significant depreciation of the local currency.
FM: What are pension funds doing to hedge against currency volatilities?
SM: Most pension funds have now been paying a lot of attention to alternative investments where we have seen investments mostly in private equity arrangements, health sector, energy and education.
FM: How has the suspension of Old Mutual and PPC on ZSE affected pension funds?
SM: The pension funds and insurance sector are the majority investors and holders of assets listed on the ZSE to the tune of above 70% or more. Following the rise in inflation levels in recent years, most pension funds have found cover on the stock exchange, which gives them both liquidity in times of need to pay pensioners and exiting members.
It also acts as an inflation hedge. The estimated exposure to this market for the majority of the more than 1 000 pension funds and all life and short-term insurance companies is above 75%. Some who do not hold significant property investments have exposure in excess of 90% in listed equities.
Therefore, trading on the ZSE then plays a major role in determining pension values. Before their suspension, Old Mutual Limited and PPC Limited were some of the major counters on the ZSE.
Suspension of this transparent and internationally recognised pricing mechanism will deprive members of an objective way of determining what is due to them and therefore can even lead to another generational transfer of assets, an anomaly Ipec is battling to address as evidenced by the various circulars and guidelines issued out in 2020.
Failure to determine a transparent and correct pricing when some members are exiting the fund will always haunt the industry in future as disputes can arise over the correctness of benefits paid. Further, because of an absence of a market to trade these counters, some pension funds may struggle to raise liquidity to pay exiting members.
Lack of liquidity to pay pensioners and exiting members is imminent as most pension funds were liquidating assets to fund these pay-outs. Lack of trading would create a worse liquidity crunch and delayed payments to members.
FM: Which sectors are majority pension funds invested in?
SM: In all parts of the economy and government projects, which brings diversity and reduces investment risk.
FM: Your parting words?
SM: The past year has been difficult for business and the country. But we are proud of the fact that we have been able to transform, adapt and grow our relevance and voice in the pensions industry.