Pension funds should rethink DB scheme model
WITH investment returns for most asset classes not performing to expectations as a result of inflationary pressures, questions are being raised over private pension funds’ continued use of the defined contribution (DC) system.
According to the Insurance and Pensions Commission (IPEC)’s 2019 annual report, Zimbabwe’s pensions industry was constituted as follows: Total Funds (1 067); DC Funds (1 030); and defined benefit (DB) Funds (37).
A recent survey by this publication shows that many pensioners are not happy with their payouts.
Zimbabwe Association of Pension Funds (ZAPF) director-general Sandra Musevenzo, told Business Weekly that inflationary pressures have contributed to the anomaly.
But she also points out that the savings mechanism inherent in the defined contribution (DC) system also has significant limitations. “From the way inflation has been in Zimbabwe, inflation risk has been the major factor affecting DC plans. The salaries and wages of employees have not been increasing in line with inflation as companies have been struggling to stay afloat.
“This has seen an impact on the replacement ratios. This might result in the contributions being made failing to provide an adequate retirement income stream,” said Musevenzo.
“Given that there is no guaranteed income upon retirement in the DC scheme, the annuities market was being used to curb this problem but of late, the annuities market has been affected by inflation resulting in the Insurance and Pensions Commission (IPEC) changing the minimum monthly pension benefits and the level pension benefits were affected by the inflation.
“Inflation erodes real value so the percentage that is being put towards savings also dwindles.
‘‘However, ignoring inflation – we are not saving enough as individuals such that at retirement income from occupational DC pension schemes would not be enough.”
Just to highlight the inefficacy of the DC system in its current state, the Organization for Economic Cooperation and Development (OECD) and its Working Party on Private Pensions updated the ‘OECD Roadmap for the Good Design of Defined Contribution Retirement Savings Plans’.
And it’s currently taking public input over the proposed changes.
Due to challenges with the present pensions system, the local regulator recently announced plans to introduce an income drawdown option for pensioners.
Income drawdown provides a flexible option for pensioners, as it allows the pensioner to leave their pension invested, while being able to draw down some of the pot as taxable income.
But it’s not a total solution.
Aligning DC and DB opportunities
Actuaries Gandy Gandidzanwa and Itai Mukadira at Risk and Investment Management Consulting Actuaries (RIMCA) say there is need for hybrid model that benefits from the DC and the DB systems.
“That only a proportion, very close to 0 percent, can afford to retire comfortably after having diligently and loyally gone through our current DC regime is a clear testimony of the inappropriateness of the model for the job at hand. It’s a result of a structural and design problem as much as it is a result of the prevailing economic situation,” said the experts.