eBusiness Weekly
BusinessWeekly Last Word
There was a time when a worker’s pension fund was one of their most valuable assets, guaranteed to provide at least a basic living income after retirement and the subsequent loss of employment and large numbers of people in the formal economy planned their life around this happy fact.
Basically most in employment would plan on using their working years to acquire a house or flat, raise their children and, through their pension fund, secure a minimum income for old age. It was a simple model that had been working for decades.
And for many the system collapsed during the hyper-inflation of the first decade of the 2000s. There were people who towards the end of hyper-inflation whose pension had sunk, after zeroes were knocked off the currency, from something that was more than half their last pay check to a few Zimbabwean cents, which when converted to US dollars might be the equivalent of a minute fraction of a US cent. Certainly this would not even buy a single sugar bean, let alone buy the basic groceries of an old person.
At dollarisation there was, for many in the private sector, little relief. Some pension funds did try to pay a small minimum monthly pension, but not all. The National Social Security Authority, NSSA, followed the same approach. Retired civil servants found themselves possibly the best off. They had never had a funded pension scheme, with the Government following a pay-as-you-go policy for decades, and had their pensions tied to a percentage of the current salary for the post they had left. But Government pay was not the highest so the pensions were very modest, but at least they existed.
Even since dollarisaton new pensions in the private sector have often been low, workers reaching retirement age being told the values of the assets held are low and hence the resulting pension will be low. Any fixed benefit schemes, where a pension is based on final salary, had long been converted in the private sector to fixed contribution schemes, whereby the retiring worker’s share of the fund is liquidated to buy an annuity and if the value of the share is low the annuity monthly payment is low.
There has been a growing chorus of discontent and even a commission of inquiry. And critics have strong grounds for wondering what happened.
Pension funds by law had to invest contributions from employees and employers with decisions being made in a way that would provide the highest possible income for employees at the end of their formal employment. Around the world there was, at times and in some companies, a degree of cheating with the employer’s management ensuring that investments were made that would benefit the company and its owners, not the staff. That automatically cut the sums available for the final pensions.
But even in a cheating fund, and certainly in those cleanly run, there were basically three classes of investment: property, equities and gilts, or government bonds. Prudent fund managers would have a carefully-calculated mix to fulfil their multiple requirements of investment, liquidity and income, which would include ensuring that there would be funds available in 70 years time to pay the pension of a 20-year-old joining today and that today’s 90-year-old could get their monthly stipend at the lowest cost.
In Zimbabwe there was an additional complication in that all funds were set at a minimum percentage holding of Government bonds. The long run of finance ministers indulging in deficit budgeting needed a captive market for their paper, and one that could be forced to buy more than it really wanted.
During hyperinflation the value of the Government bonds vanished. Indeed, near the end then RBZ Governor Gideon Gono actually paid off the entire Zimbabwe dollar debt at a minute fraction of its original worth, but effectively he prevented any revaluation of that debt with currency reform or dollarisation. It just disappeared. So funds who talk about asset destruction have a point, but are not telling the whole story.
The rest of the assets held by the funds, in property and equities, survived the hyperinflation meltdown largely intact. The value of a building or 1 000 shares of Delta has a value regardless of currency used or the economic climate. And many pensioners, or people who contributed for years to pension funds but have yet to collect, are curious as to why pensions are not being calculated on using the surviving assets. Many could understand why their pension, in real value, is half what they could have expected before Government bonds were rendered valueless. What they cannot understand is why it is so much less.
This is where the pressure has been building on the Insurance and Pensions Commission to take action. At present it is “consulting” the pensions industry and reports there are “complications”. A more decisive approach is needed, which surely must include all funds being forced to report their assets, income and expenditure in detail in a simple and transparent manner and coming up with plans to ameliorate the disaster of hyperinflation and the problems of slow growth afterwards.
Financial experts, the staff of the commission itself, and, that perennial favourite in Zimbabwe, the consultant, should between them be able to work out how much is available for each pensioner or potential pensioner and then calculate how much they can be paid. To treat the hyperinflation as an ordinary disaster is not going to help.
To some extent the quick fixes already introduced simply add to long term problems. NSSA provides a good example. It was set up in 1994, so no one has been covered for more than 25 years. This means most people who have already retired under NSSA did not have many years of insured service so pensions were low. The minimum pension thus covers almost all NSSA pensioners, paying them more than they would otherwise get. But that money has to come from somewhere and it seems clear that NSSA is having to reduce what could be available for the person retiring with 45 years cover in 2039 to pay something more to someone who retired in 2009 with 15 years cover. There are good reasons for this, but it does have an effect although possibly not as much as the mismanagement and probably corruption uncovered by the recent audit, another problem.
The commission is now working on future policies that will restore the pension industry to what it should be, and that is an important part of its work if it is to mean anything.
But it must also take far more decisive action to see what can be done to clean up the mess of the past, and the lack of commitment in much of the private sector as well as NSSA to do something more constructive.
