Earlier in February Zimbabwe’s monetary authorities responded to calls for a free floating exchange rate system and set up the foreign currency interbank market.
And in June the Government effectively ended the long-standing multi-currency system and re-introduced the Zimbabwe dollar through Statutory Instrument 142 of 2019.
Between February and October 2019, the local currency (RTGS dollar, then later Zimbabwe dollar) has moved from trading at a rate of 2,5 to the United States dollar, to around 15 to the US dollar on the interbank market, a circa 500 percent depreciation.
But a perhaps unexpected consequence has been the drastic depreciation of the Zimbabwe dollar against the US dollar.
Although most sectors of the economy have been affected, it is arguable that the sectors that will suffer the longer-term effects of the currency depreciation are the pensions and insurance sectors.
In respect of the local pensions sector, depreciation of the Zimbabwe dollar against the US dollar is affecting the imputation of assets held through defined benefit retirement plans.
A defined benefit pension plan is a type of pension plan in which an employer promises a specified pension payment, lump-sum or combination thereof on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age.
To this extent, an inflationary environment such as the one Zimbabwe is presently undergoing affects the purchasing power of the pension.
On the other hand, defined contribution (DC) plans — which are a type of retirement plan in which the employer, employee or both make contributions on a regular basis, and future benefits fluctuate on the basis of investment earnings — have also not been spared by the weakening currency because a significant number of pension funds are heavily invested on the capital markets, which have been underperforming in line with the depressed economic performance.
“The essence of a pensions fund is basically to ensure that monies that put in at the accumulation phase correspond or are better off at the de-accumulation stage. But current outputs are not as expected,” says Insurance and Pensions Commission (IPEC) pensions director Joshpat Kakwere.
“There can be no discussion about pensions without talk of the economy or the operating environment.”
The insurance sector has not been spared either. Health insurance providers (medical aid societies) are currently struggling with the problem of shortfalls, which Association of Health Funders of Zimbabwe (AHFOZ) chief executive Ms Shylet Sanyanga says are being caused by the pricing structure whereby doctors are using the parallel exchange rate yet medical aid members are contributing to medical aid societies in the local currency.
On the other hand, Life Assurers’ investments on the local capital/equities markets (mainly the Zimbabwe Stock Exchange) have taken a significant knock.
Official numbers from IPEC’s 2019 First Quarter Life Assurance Report highlights weakening asset quality within the sector.
According to the report, total assets for the Life Assurance industry decreased by 2 percent from $3,6 billion as at December 31, 2018 to $3,5 billion as at March 31, 2019.
“This decrease was mainly driven by a decrease in the value of equities from US$2,2 billion as at December 31, 2018 to US$1,8 billion as at March 31, 2019, which was attributable to the bears market on the Zimbabwe Stock Exchange. Fixed properties and equities constituted 73,83 percent of the total insurance industry assets, which is a reflection of the general nature of the liabilities for the sector, which are also long-term in nature,” reads part of the IPEC report.
The equities market accounted for a huge 52,80 percent of Life Assurance firms’ asset allocations, property came in to account for 21,75 percent, while prescribed assets accounted for 13,70 percent. Other investments, money markets and cash accounted for 5,72 percent, 4,24 percent and 1,80 percent of asset allocations, respectively.
Due to the long-term savings nature of a pension fund or an insurance plan, inflation has always been a key risk to the value of their plans.
All things being equal, it’s a sad reality that Zimbabweans invested in pension plans and insurance policies are going to take some losses.
Consider one whose pension plan accrued US$100 000 at a rate of 1:1 to the US dollar over the past decade; with the present currency depreciation levels and a rate of 1:15, that amount has declined today to around US$6 600.
But the key is how to manage these funds/plans in such an environment.
Insurer, Zimnat recently said it has since received Reserve Bank of Zimbabwe (RBZ) exchange control permission to invest policyholder’s funds contributed in foreign currency in offshore financial markets. The exchange control approval relates to Zimnat Life Assurance’s Diaspora Funeral Cash Plan, which is designed for Zimbabweans living and working in the diaspora.
Old Mutual Life Assurance Company has said it is increasingly spreading the risk of its investments by moving from a focus on institutional markets to more “dynamic” investment strategies.
First Mutual Holdings CEO Douglas Hoto said the company has made a proposal to receive land from Government in place of Government-issued Treasury Bills.
Old Mutual pension fund says it has invested in a hydro-power station in Chipinge as well as clinics in Lupane and Ngezi.
Clearly pension funds and insurance firms are not sitting on their laurels. But then again, there is only so much these companies can do in a hyperinflationary environment.
“I must mention though that in a hyperinflationary environment it is never possible to totally protect or cushion customers from the loss of value, but we seek to minimise that,” said Old Mutual Zimbabwe chief executive Jonas Mushosho.
So the onus is on the fiscal and monetary authorities to fix the currency depreciation problem.