The Insurance and Pensions Commission (IPEC) is pushing to have outstanding contribution arrears to local pension funds amounting to $600 million ring-fenced and amortised over a 20-year period — to give the sponsoring employers financial breathing space to recover.
The liabilities as at December 31, 2017 constituted 15 percent of the occupational pension funds’ total assets–implying that the pension benefits are not fully funded, Zimbabwe’s pensions regulatory body said in a draft document on proposed reforms to the country’s pension system.
The arrears compromise the ability of pension funds to pay the benefits in full and on time. Outstanding and due benefits entitlements stood at $84 million at the end of 2017.
IPEC said contribution arrears in respect of parastatals and local authorities constituted more than 65 percent of total contribution arrears of occupational pension funds.
Occupational pension funds are voluntary schemes set up by employers for their staff. In addition to the problem of contribution arrears, most of the few remaining defined benefit schemes have actuarial deficits. The available assets of these funds are not adequate to meet the respective funds’ obligations to their members, creating underfunded liabilities and undermining soundness of the pension plan.
The tough economic environment Zimbabwe experienced over the past two decades has seen many firms struggling to meet statutory obligations such as pensions and taxes.
Challenges, which many companies are still battling with include low investment and poor competitiveness due to high production costs which are relatively higher.
Reprieve for companies
“To deal with the current contribution arrears it is recommended that outstanding contribution arrears are ring-fenced and amortised over a period of 20 years, depending on the amount and payment ability of the sponsoring employers,” said IPEC.
“Such amortisation schemes should be approved by the Insurance and Pensions Commission.
“One of the conditions for approval is that sponsoring employers should undertake to make good arrears contributions for members due for pension benefits and to pay all current pension contributions as they fall due to avoid chasing a moving target.”
IPEC said amortising arrears would allow financial breathing space for sponsoring employers and enable them to turn around under the new political and economic dispensation, without being constrained by the pressure to immediately clear contribution arrears. In addition, sponsoring employers are encouraged, where it is possible to cede some of their productive assets to the pension fund in lieu of contribution arrears, as a way of dealing with the problem of unfunded benefits.
Analysts says the model being pushed by IPEC was “classic” as this would ease burden on companies with huge pension contribution arrears and give them time to recover.
“That is quite being innovative,” economist Dr Gift Mugano told Business Weekly in an interview.
“It helps companies to recover and that concept should also adopted by other statutory bodies in the spirit of helping sponsoring employers to recover.
The proposed pension reforms seek to come up with an efficient pension system.
Broadly, the reform agenda will focus on improving sustainability, affordability, adequacy and coverage of the pensions. The reforms are also meant to improve welfare of pensioners, harness long term domestic savings and improve regulatory framework.
In addition they are targeted to strengthen the governance, management and improve efficiency in the delivery of pension services within the pension industry.
Apart from arrears, some of the challenges besetting the industry include low confidence levels, poor viability of pension funds, low coverage and poor corporate governance.
Zimbabwe’s pensions industry is divided into four categories, namely mandatory national pension system administered by the National Social Security Authority, pay-as-you-go public service pension scheme for civil servants and uniformed forces, the voluntary occupational pension funds and the individual Pension Plans.
The majority of these are defined contribution schemes, either self-administered or insured schemes. Previously, most of the occupation schemes were defined benefit.
But since 2000, the majority of the schemes converted to defined contribution. Almost all private occupation schemes are defined contribution schemes, with the remaining defined benefit schemes predominantly those sponsored by parastatals, such as ZESA Pension Fund, Communications and Allied Industry Pension Fund and National Railways of Zimbabwe Pension Fund.