Pension funds to pay out more on inflation losses

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Martin Kadzere 
Zimbabwean pensioners and insurance policy holders are in line for additional payouts after they were heavily shortchanged during the conversion of their benefits at dollarization in 2009, a commission of inquiry set to investigate the matter has recommended.

This would, however, be done in a manner that would not threaten the viability of the pension funds and insurers, sources familiar with the issue told Business Weekly.

The Zimbabwe government commissioned an investigation in 2015 into how pensions and insurance benefits were paid out following a big outcry from pensioners and policy holders.

Pension fund values were badly eroded in values due to devastating hyperinflation, which soared to a record 500 billion percent in 2008 according to the IMF.

The government wiped out the hyperinflation figures in 2009 when it abandoned the use of the Zimbabwe dollar for a basket of foreign currencies, but mostly dominated by the U.S. dollar, leading to what is now generally called dollarisation.

The Pension Commission Inquiry – chaired by retired judge Justice George Smith – presented its report to Finance Minister Patrick Chinamasa last week for onward submission to President Robert Mugabe.

Minister Chinamasa confirmed this week the report had been presented to him but declined to discuss its content, citing confidentiality and protocol issues before its presentation to the state President.

Justice Smith was unavailable for a comment. But sources in the pensions and insurance industry familiar with information and recommendations made to the inquiry said they expected further payouts to those who had received paltry benefits following the massive devaluation at dollarisation eight years ago.

They told Business Weekly they expected the commission —  even without spelling out detailed scales of payouts in monetary terms – to recommend that compensation be made to the thousands of policy holders and pensioners from some the assets that “survived” Zimbabwe’s hyperinflation.

“From a broader assessment, the commission would have recognised that policy holders and pensioners were prejudiced and must be compensated,” said one source. “That means an audit has to be conducted to determine the assets of pension funds and insurance companies that survived hyperinflation so that compensations can be made to thousands who were prejudiced.”

Pension funds hold assets worth $10 billion, divided into four main categories—the compulsory scheme, administered by the National Social Security Authority; the Public Service Pension Scheme; voluntary occupational pension funds; and personal pension plans.

While inflation is largely blamed for the loss of value of pension funds and policy holders’ wealth, the sources said there was no justification for paying out “insignificant amounts” as some members had contributed for a long time, several years before the onset of the hyperinflationary era.

“The window of inflation is a small component,” another source said. Industry sources said they would not be surprised if the government established another body to handle the compensation process, taking into account variation of contracts under various pension schemes and insurance products.

Under the existing legislation the Insurance and Pension Commission (IPEC) can also be assigned to deal with such matters, according to the industry sources.

Which assets survived hyperinflation?

Experts say the first component of loss of value were in monetary assets.

Pension Funds were required by law to invest in prescribed assets such as government bonds, municipal bonds and treasury bills. Up to 45 percent of their assets were to be held in these asset classes. They also needed to hold cash to pay on going benefits and expenses.

On average a typical fund would hold 5 to10 percent of assets in cash and near cash assets. As such, about 50 percent of assets were in monetary and became valueless due hyperinflation.

For insurance companies, this percentage is about 40 percent. This accounts for about 45 percent of the total value of assets and hence a corresponding reduction in benefits. Of the remaining assets, which is about 55 percent, survived the hyperinflation.

They are mainly in property and shares listed on the stock market. However, the value of these assets is directly related to the fundamentals of the economy.  For instance, a building that has voids has a residual value, First Mutual CEO Mr Douglas Hoto said.

“If it is fully rented it can generate income and it’s taken at its intrinsic value,” said Mr Hoto. “Typical the residual values are around 30 percent of the intrinsic value. So if you take 30 percent of 50 percent you end up with 15 percent of what the value would have been.”

He said a similar approach could be used for equities. Companies with low production and were loss making and were around 20 to 30 percent of their intrinsic value.

On average the current values of benefits represent 10 percent to 15 percent of what would have been expected. Thus the lost value is around 85 percent to 90 percent.

This was confirmed by the actual compensation for actual bank balances for the whole country at $20 million when the minimum deposits in bank were equivalent of around $2 billion in 2009 terms. The loss in terms of bank balances was 99 percent. In the end each depositor got $5 on average.

Mr Hoto admitted that the pensioners and policy holders deserved compensation. But the insurance companies and pension funds could increase the benefits without increasing the value of assets. And the value assets could not increase without a change in the fundamentals of the economy in which they operate. “The only other way will be an external injection of capital into these institutions,” said Mr Hoto.

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