Ipec has come up with a guideline framework on how pension funds and insurance companies must determine and allocate revaluation gains that arose as a result of the currency reforms.
The move is meant to ensure that insurance policyholders and pension fund members are treated in a fair and equitable manner, taking into consideration asset repricing due to currency reforms.
In 2019, Zimbabwe went through significant currency reforms that saw valuations of assets and liabilities held by pension and insurance companies assume Zimbabwe dollar values away from US Dollars.
To quote IPEC, “as a result of currency reforms and other Government measures, insurance companies and pension funds converted all insurance contracts’ sums insured, all pension balances in insurance company deposit administration and defined contribution funds, all benefit amounts in insurance company annuity contracts, all benefit amounts for cash in lieu of funeral policies, and all benefits in pay status for defined benefit funds from USD to ZWL at a 1:1 rate”.
This currency reform process, according to IPEC, resulted in significant revaluation gains as the change in the value of assets backing policyholder and pension fund members’ liabilities are larger than the change in the liabilities based on a 1:1 conversion of policyholder and pension members’ values from USD to ZWL. From an asset base of approximately US$10 billion by end of December 2018, the values were significantly lowered to just above US$644 million after currency reforms.
Said IPEC: “The insurance and pensions industry is now faced with yet another challenge that is threatening pensioner and policyholder values.
However, unlike in 2009, when industry players employed their own strategies in determining and allocating revaluation gains, resulting in small payouts to policyholders and pension fund members, IPEC is this time taking a leading role to protect pensioners and policyholders hence the latest guideline framework.
According to IPEC, the framework will provide the key principles to be adhered to by all insurance companies and pension funds when determining and allocating revaluation gains that arose as a result of the currency reforms.
The regulatory body said the measures “have specifically been informed by lessons drawn from the 2008/2009 experience, which saw the industry employing its own strategies in the absence of standardised guidelines from monetary, fiscal and the supervisory authorities on how best to manage the currency changeover”.
Following the 2008/09 switch to a multicurrency regime, Zimbabwean pensioners and insurance policyholders suffered significant prejudice when Zimbabwe’s currency converted from the ZW$ to the US$ following unprecedented and prolonged periods of hyperinflation during the period 2007 to 2008.
The material prejudice suffered by policyholders resulted in Government appointing a Commission of Inquiry led by Retired Judge Justice George Smith with a mandate to establish the extent of prejudice, if any, to pension fund members or to insurance policyholders or the beneficiaries of such persons. Findings by the Commission pointed out several shortcomings that it said characterised the conversion processes and approaches employed by life assurance companies.
“In many instances, this resulted in small payouts to policyholders and pension fund members that were viewed as unfair to policyholders and pension funds members,” said IPEC in Guideline Paper on Currency Reforms sent to industry players and seen by Business Weekly.
IPEC said the primary objectives of the guideline framework is to ensure fair and equitable treatment of insurance policyholders and pension fund participants by insurance companies and pension funds following the recent currency reforms.
The framework will also provide standards/principles to be adhered to by the industry on treatment of revaluation gains emanating from the recent currency reforms. This is expected to enhance uniformity and comparability of industry results on treatment of revaluation gains.
The guideline will also provide standard methodologies to be used in determining and allocating revaluation gains. This, according to IPEC, will help avoid a repeat of the 2008/2009 challenges that arose from lack of sufficient guidance from relevant authorities and professional bodies. In terms of scope, the guideline “shall apply to all insurance companies and shall cover adjustment of values due to the 2019 currency reforms for all In-force insurance contracts effective February 1, 2009 through to February 22, 2019, upon insurers, pension funds and administrators having been satisfied that distribution of assets for preceding years since dollarisation was carried out in a fair and equitable manner”.
The effective date of this guideline will be December 31, 2018 and will remain in application until the earlier of:
“When the value of benefits in USD-equivalence as of the Determination Date has been fully restored; or such earlier date as may be declared by IPEC.”
IPEC, however, said the final guidance will be issued in terms of a statutory instrument that awaits gazetting.