Are pension funds delivering on their promise?

ASIMPLE word that carries so much meaning. Simply defined, purpose is the reason for which something is done or created or for which something exists.

Largely believed to have originated in the second half of the 19th century pension funds' fundamental purpose was to ensure retirement income.

Are pensions funds in Zimbabwe

still effectively playing this role?

This was one of the key issues at this year's Zimbabwe Association of Pension Funds (ZAPF) annual conference.

The answer is not clear cut, but what is obvious is that local pension funds are currently facing significant headwinds that have complicated their role.

One of these headwinds is the inflationary environment that has eroded wages, resulting in a situation of declining contributions and rising costs.

Old Mutual Life Assurance Company managing director, Rutendo Magorimbo, highlighted a disparity between the contributions and expected benefits.

“We can only pay what you put in. At most the employee portion is around 6 percent of earnings. From that 6 percent you expect us to pay you 100 percent salary. It doesn't work like that in any economy,” she said.

“We need to introspect and look at how much we were putting aside in real terms, and see if the question you are asking pension administrators is fair”.

Magorimbo raises a fair point. But have pensioners really asked for payouts that are equivalent to “100 percent salary”?

Or are they well in their right to expect return on investment? After all, it's one of the key tenets of the pensions promise.

Let's look at the basics again: a pension fund is a pool of money that is to be paid out as a pension when employees retire.

And pension funds invest that money to multiply it, which will potentially provide more benefit to the retirees. But as indicated earlier, inflationary pressures have put some of these standard expectations.

“You cannot do medium-to-long term planning in an unstable environment,” said Comarton Consultants (Pvt) Ltd managing director, Mr Richard Muirimi.

And long-term is the hallmark of pension funds investing. Typically, pension funds have 40-year average investment returns of 8 percent or 9 percent.

Zimbabwe's pension funds' local investments have been affected by inflationary pressures. Hence their push for the regulator to allow for foreign investments.

However, foreign investments are not completely risk-free either, as Mr Muirimi pointed out.

“We need to understand what is happening in Europe. Their inflation rates are circa 9 percent. If we are going to do foreign investments, they must be able to generate returns that are higher than that inflation,” he said.

“We also need to find out what we can do within this country to be able to achieve US dollar returns”.

Clearly, in an inflationary environment pension funds need to be more strategic about where they place their monies, but sometimes the real problem is the model of the fund itself.

For instance, one concern is around the National Social Security Authority (NSSA)'s contribution rates, which are not likely to be sustainable going forward.

Said NSSA director for social security, Mr Shepherd Muperi: “NSSA's contribution rates are 9 percent, while the average contribution rate for occupational pension funds is around 20 percent.

“Our contribution rates are also based on capped earnings, making it among the lowest in the region”.

If indeed there are significant issues with both the structure of pension funds and the environment they operate in, then there is perhaps a need for a fundamental rethink of the pensions model.