Pension funds can skirt hyperinflation pitfalls

ZIMBABWE’S pension funds could potentially skirt the pitfalls of the previous hyperinflation era that saw members losing their long-term savings.

Hyperinflation has a tendency to expose firms to varying rates of price and/or asset adjustments, which can lead to the understating or overstating of assets and income.

For entities such as pension funds that deal with the public’s monies for an extended period of time, the consequences can be devastating as was experienced around 2008/2009.

Companies tend to deal with hyperinflation by applying hyperinflation reporting, which, according to Investopedia, is the “practice of adjusting financial statements according to price indexes”.

The problem for local pension funds during the previous hyperinflation period was that the regulator — the Insurance and Pensions Commission — was not at the time providing any guidance around the issue of hyperinflation.

But pension funds’ hands were not clean either.

The Justice Smith Commission of Inquiry Report pointed to issues such as inadequate legislation and regulatory failure; poor corporate governance; poor record keeping; poor accounting, auditing, actuarial; and other risk management practices for the crisis that befell the sector during that time.

The regulator was clearly slow to the game, but to be fair, Zimbabwe had never experienced hyperinflation of this magnitude.

Perhaps an overstatement, but a December 2008 issue of Forbes Asia estimated Zimbabwe’s annual inflation rate at around 6,5 quindecillion novemdecillion percent.

To be sure, “quindecillion novemdecillion” is 65 followed by 107 zeros.

Current inflation is 737,3 percent, according to Zimbabwe National Statistical Agency, but policy makers are certain that the inflation rate will fall during the second half of the year.

The insurance and pensions regulator is also playing its part to ensure that pensioners are protected this time around.

IPEC is currently working on a hyperinflation reporting guidance for pension funds.

“As you are aware, the accounting basis for financial statements of pension funds is prescribed in Pensions and Provident Funds Regulations (S.I. 323 of 1991) as historical cost accounting,” said Commissioner Dr Grace Muradzikwa in a letter to pension funds associations.

“In April 2020, the commission reviewed the reporting templates for pension funds’ through Statutory Instrument 91 of 2020. One of the major changes to financial reporting by pension funds is that assets are now reporting on market values.

“Following engagements with the Institute of Chartered Accountants Zimbabwe, the commission has resolved to adopt IAS29 to comply with FRS standards.”

The guidance should address areas of major concern around financial reporting for pension funds in the present environment following currency adjustments, which started in 2018.

The changes began with the separation of the bank accounts in October 2018; then the RTGS dollar was introduced into the multi-currency basket in February 2019.

In June 2019, the Zimbabwe dollar was introduced as the sole legal tender.

Earlier in February, PricewaterhouseCoopers Zimbabwe (PwC) senior partner Esther Antonio highlighted some concerns that will still need to be addressed even if the pension funds adopt hyperinflation reporting, especially with regards to last year’s numbers.

“The Public Accountants and Auditors Board (PAAB) as well as some of the accounting bodies, including the Institute of Chartered Accountants, issued a pronouncement that Zimbabwe was now a hyperinflationary environment. While the pronouncement was made in July (2019), it applies for the financial statement for the entire year. Is it applicable for pension funds?

“It’s certainly applicable for the planned sponsors, so what people will see is that you might have a situation where the contributions made as reflected in the companies’ books and records are not going to agree with the contributions received in the pensions funds’ books because the company is going to take their transaction throughout the year and apply a hyperinflation index all the way through to December 2019. So that’s something we need to keep an eye on. The current framework, as it is, makes it difficult to be clear on this issue,” said Ms Antonio.

“A key issue is that of fair value measurements, not only is this related to the earlier issue of functional currency changes, but the question is, how does the valuer prepare a valuation that is meaningful? If the pension fund financial statement is being prepared in Zimbabwe dollars, it means that the valuer needs to come up with the valuation that is also in Zimbabwe dollars.

“We have only had the sole currency regime for seven months now, so will they have adequate inputs? And how are they going to make assumptions going into the future?

“Key is that the pension fund has a proper conversation with the valuer to understand how the valuation would have been done, the limitations of the valuation and what is the potential range of outcomes if the assumptions were to change. The same applies to actuarial valuations.”

As regards the latter, a valuation guidance has been issued, but only effective compliance will ensure that pensioners do not end up as the ultimate victims again.