Pension funds dissolutions risk future for many

A PENSION fund is only as good as it lasts. Over the last few years there has been an increase in the number of private pension funds seeking dissolution.

Sadly, most members of these dying pension funds tend to be unconcerned about their closure as long as their contributions are fully reimbursed.

“At least I got my money while I am still alive. I can re-invest it myself and secure my own future,” said Elias Nhini, whose company effectively dissolved its pension fund last year.

But a pension fund is not a bank; all things being equal, it should be underpinned by the “socially conscious” tenet of securing a member’s future in their retirement. Only rarely do individuals use these reimbursed funds to secure their future.

Zimbabwe has a pensioner coverage ratio of about 10 percent of the population above the age of 65, which means that about 10 out of 100 persons who are above retirement age are receiving a pension.

That is largely due to the role played by the national pension scheme administered by National Social Security Authority ( NSSA), whose membership is compulsory for all those in formal employment.

Last year alone, official figures from the country’s insurance and pensions sector regulator — the Insurance and Pensions Commission ( IPEC) — show that a total of 26 occupational pension funds were undergoing dissolution.

IPEC reported that of the 26 cases, four dissolutions were finalised during the year. There is no doubt that a difficult economic climate was one of the major contributors to some of these private pension funds seeking dissolution. Notwithstanding other key macro-economic challenges, 2019 was typified by increased inflationary pressures and rapid depreciation of the Zimbabwe dollar.

Consequently, pension funds, like most other entities, struggled to cope, and the sector’s contribution arrears rose to $621,7 million as at the close of 2019. Employer contributions were largely considered to be sub-optimal during the period.

IPEC director of pensions Cuthbert Mujoma says there has been steady decline in the number of pension funds over the past two decades.

“At its peak around mid-90s, there were about 2 300 pension funds. Right now we are speaking of 959 pension funds as of March 2020.

“It is a reflection of viability challenges being faced by the sponsoring employers,” he said.

“As you may appreciate, our industry follows the fortune of the economy. In terms of the possible impact, one of the key impact is that of consolidation of the industry in terms of the number of funds as well as membership.”

As at the end of last year, official figures show that registered occupational pension funds stood at 1 067, with a total membership of 809 176. Of the 1 067 pension funds, only 760 were active, constituting 71,2 percent of the total pension funds.

Although emerging as a result of an underperforming economy, the dissolution of pension funds also had the potential to further economic misalignment due to the sector’s critical contribution to the economy.

In Zimbabwe, pension funds have historically dominated the stock market. Last year, equities and property accounted for 79 percent of pension funds’ investment assets.

The increase in the number of funds closing shop is working against Government efforts to improve the pension penetration rate (the ratio of the pension industry assets as a percentage of Gross Domestic Product), which ended 2019 at 33,4 percent, up from 19,19 percent in 2018.

According to IPEC Commissioner Dr Grace Muradzikwa, indications are that more pension funds could close down this year.

“In 2019, 26 pension funds were undergoing dissolutions, with indications being that more inactive pension funds will be applying for dissolutions. Troubled pension funds are also submitting turnaround schemes for consideration,” she said.

Weaknesses in the previous regulation of occupational pension funds are made apparent by some of the challenges stalling finalisation of the dissolution of some of the funds.

According to IPEC, some of these challenges include the absence of records from sponsoring employers; problems locating members and hence challenges in reconstitution of board of trustees or committees to oversee the dissolution process; and lack of adequate resources to pay liquidators. The regulator is therefore strengthening regulatory frameworks around the dissolution of pension funds.

“It is an area of concern, and we have been working with the pension funds to appreciate some of the challenges that they are going through. We do have the issue of contribution arrears and sponsoring employers; and in some cases they are also citing the co-existence of these private occupational funds and NSSA (the National Social Security Authority) and also given the challenges that sponsoring employers are facing.”