Golden age of pension funds disappearing
http://www.theindependent.co.zw/
Thursday, 10 February 2011 16:41
By Evonia Muzondo and Oscar Diura
PENSION funds, both private and public are among the largest institutional
investors in global financial markets. They help individuals save for their
retirement and are expected to protect the value of their pensions.
The Zimbabwe pension fund industry is emerging from a low base after years
of hyperinflation. Low industry capacity utilisation resulting from limited
access to lines of credit and unsustainable interest rates on loans being
offered by the banking sector has impacted negatively on companies‘ ability
to make contributions to pension funds.
This has stifled investment options and the ability of the pension funds to
meet their monthly obligations to pensioners, provide meaningful income
returns on retirement and hence clearly losing the essence of their core
function.
This situation is not unique to Zimbabwe, even globally returns and payouts
on pension funds have been dwindling. Poor returns from pension funds and
very small tax incentives have created an environment where saving for
retirement is becoming less and less appealing.
According to a leading corporate accountancy firm in the UK, a pension pot
of £100 000 will create annual annuity payments of £7 000 a year — which is
£2 000 less than in the year 2000.
However those who had invested money in savings accounts have in the same
period done much better, with the account on average growing at twice the
rate of the average pension scheme between January 2000 and December 2009.
Major volatility in equity markets has been blamed for this.
Pension funds operate in an environment characterised by a number of serious
market imperfections such as malfunctioning labour markets and adverse
conditions in the economy, which might lead to a fall in asset prices and
earnings, making portfolio management increasingly difficult. High
unemployment means less contributions leading to less dollars to cater for
the old, retired people.
Government interference and sometimes poor financial education of investment
managers which adversely affect the allocation of savings and portfolio
management decisions — are some of the factors.
During the past decade local pension funds seeing the risk of inflation
rising rapidly decided to move from a defined benefit plan to a defined
contribution plan in order to remove the increasing risk from themselves. So
effectively, what pensioners put in is now what they get out.
The current liquidity crisis in the country has meant that most pension
funds have been unable to make pension payouts in foreign currency or are
taking longer to pay. Or, in cases where payments are made, they have been
inadequate to meet the pensioners’ basic needs.
The National Social Security Authority (NSSA) pays out a minimum of US$25
per month whilst thePoverty Datum Line is approximately US$500. Years of
hard earned contributions have been made worthless and rendered the
pensioner poor.
Even though premiums are now being paid in US dollars, the liquidity
situation has not improved two years after the adoption of multiple
currencies. Monthly remittances from pension deductions from both the public
and private sectors have dwindled. Companies are battling to raise enough
cash for salaries, with some paying allowances.
The pension deductions on pay slips are sometimes technical with no forward
remittances to the pension fund. Threats from NSSA have not deterred some
companies from continuing the practice.
In the Herald of January 17 2011, the Local Authorities Pension Fund issued
a notice to its clients informing them that it would not be able to meet its
obligations to pensioners every month. The same situation could also be the
case with other pension funds.
Most of them had invested heavily in equities and property in order to
preserve value during hyperinflation that wiped out the hard earned Zimbabwe
dollar savings of pensioners. These investments suffered a significant
decline in value after the economy dollarised. Value of properties fell by
an average of 50% and stock prices on the ZSE were subdued as the number of
sellers outweighed buyers.
Equity investments take longer to cash in, provided there is a buyer,
increasing the turnaround time from deal execution to receipt of funds.
Then there is also the erosion of tradable investments and lack of
investment options on the local capital markets. Government legislation that
prohibits pension funds from investing offshore also stifles portfolio
growth.
The local bourse is struggling to tick owing to liquidity challenges and
investor anxiety over a number of policy issues.
In 2010 the Zimbabwe Stock Exchange was relatively flat meaning a number of
portfolios remained stagnant. Offshore investment could be allowed in order
to diversify the funds portfolios and reduce country risk. The amount
invested offshore may be limited to a percentage to avoid concentration
risk.
Rental incomes from property portfolios have not been significant.
There have been high default rates by sitting tenants since the economy
dollarised.
A lot of tenants are streamlining or closing businesses. There is therefore
much unoccupied space in the city due to high rentals as tenants opt for
office parks where rentals are slightly lower.
This would not have been the case had pension funds been allowed to
diversify portfolio funds offshore thereby reducing funds’ huge weighting on
local real estate.
Prescribed asset requirements were a contentious issue even before
dollarisation. Pension funds were compelled to invest in money market
instruments that quickly lost value.
The proposal by government to re- introduce compulsory prescribed asset
ratios should be shelved until there is economic improvement and renewed
confidence in the sector. Insurance and pension funds are required by law to
hold at least 30% of their assets in local registered securities, loans
guaranteed by the state or loans to local authorities approved by the
commissioner of insurances.
There are no financial instruments on the market to justify the enforcement
of the requirement.
The government, in consultation with industry players, should agree on the
levels of prescription, which at 30% is somewhat high for an environment
characterised by low liquidity levels.
Asset yields and tenure should also be attractive and take into account the
need to have a constant cash buffer to meet monthly obligations.