Zimbabwe’s pension funds’ 2019 numbers are largely expected to reflect significant losses as they grapple to reconcile with the currency adjustments that picked up pace last year.
Currency reforms have shifted the operating environment of the pension industry, and funds have struggled to cope.
While most local companies have adopted International Financial Reporting Standards (IFRS), which factor in hyperinflationary accounting, the country’s pension funds suffer from the fact that the attendant regulatory framework does not specify an accounting model in a hyperinflationary environment.
Local pension funds’ reporting framework consists of the Zimbabwe Pension and Provident Funds Act (Chapter 24:09); Statutory Instrument 323 of 1991 (Pension and Provident Funds Regulations); fund rules; generally accepted accounting principles, and various Insurance and Pensions Commission (IPEC) circulars.
Observers, however, say the Zimbabwe Pension and Provident Funds Act in particular, as it relates to pensions funds financial reporting has been overtaken by developments such as hyperinflation.
The Act is, however, in the process of being reviewed, with Finance and Economic Development Minister Mthuli Ncube, recently indicating that the updated law could be promulgated by June.
PricewaterhouseCoopers Zimbabwe (PwC) senior partner Ester Antonio, says pension funds’ 2019 financials are likely to show some significant losses in value.
“What are the key developments we need to watch out for when we are reading (pension funds’) financial statements this year? It is important to look at pension funds’ financials alongside the financial statement(s) of the company or planned sponsor.
“The first thing is the functional currency changes. Starting with the separation of the bank accounts in October 2018, the RTGS dollar was introduced into the multi currency system basket, and in February and then in June the Zimbabwe dollar was introduced as the sole legal tender and the multi currency basket fell away
“It means that we used to get pension funds financial statements that were stated in US dollars; for 2019 these financials will now be in Zimbabwe dollars, so it’s very important to understand what the administrator or the preparer of the financial statements done to move the financial statements from United States dollars to Zimbabwe dollars,” she said.
Last year, the regulator IPEC issued Circular 2 of 2019, which specifically catered to the issue of financial reporting, which states that “Financial Statements should go beyond adherence to International Financial Reporting Standards (IFRS) and other rules and regulations that govern reporting to provide additional disclosures/information that will enhance the usefulness of the reports to relevant users.”
But perhaps the real problem may lie at how the pension funds re-value their figures and assets in view of the currency changes.
Added Ms Antonio:
“Statutory Instrument 33 of 2019 says that you must move from US dollars to Zimbabwe dollars at an exchange rate of 1:1; so what do we expect to see when we look at the balance sheet of a pension fund? If there was a building that was worth US$2 million the pension fund is supposed to carry that at cost when they move it over to Zimbabwe dollars, it will now show as $2 million. Is that the correct value? What is the administrator going to do to make sure that the financial statement reflects the true value of the receipts, the expenses, the assets and the liabilities of the pension funds?
“It probably means that some pension funds that haven’t had a valuer looking at, or revaluing their assets, might need to get one to get a sense of what is the true value of the assets that are sitting in that pension fund.
“Suffice it to say there will be some loss in value in the pension assets, because if the pension fund was sitting with shares or cash that was denominated in US dollars and that moved to Zimbabwe dollars at 1:1, and now the exchange rate has moved from 2,5 at the introduction of the RTGS dollar to around 18 on the interbank market, it means those assets might not be worth what they were worth last year.”
At the close of last year, the IPEC said it was developing a valuation guidance that they expected would guidance to inform the reporting as at December 2019.
“The guidance that we are coming up with is in consultation the Valuers Council of Zimbabwe, which is for property valuations, and then with the Actuarial Society for Asset Valuations. We are hoping that at least we will eliminate the inconsistencies,” said IPEC commissioner Dr Grace Muradzikwa at the time.
The hyperinflation curse
To the extent that local pension funds are not specifically required to adhere to IFRS, they need to find a way to factor in the prevailing hyperinflationary environment in their 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.”
Retired Judge Justice Moses Chinhengo said the industry needs to address issues identified in the Justice Smith Commission of Inquiry Report, such as inadequate legislation and regulatory failure; poor corporate governance; poor record keeping; poor accounting, auditing, actuarial and other risk management practices.
He, however, highlighted that Government needs to address the “macro-economic causes of loss of pension values such as high levels of inflation, currency de-basing, dollarisation conversion processes and de-monetisation.”