Preserving pensions’ real value

09 Oct, 2020 - 00:10 0 Views
Preserving pensions’ real value

The ManicaPost

Ray Bande Senior Reporter
In the decade leading to 2008, Zimbabwe experienced loss of value on its long-term savings as a result of inflation, with the second highest inflation rate ever recorded in world history being recorded in November 2008.

The inflation saw prices doubling up every 24 hours.

In 2009, the economy dollarised and a lot of work was done to rebuild confidence in the pensions sector so as to encourage people to continue putting aside some money for retirement. No doubt, every citizen needs a liveable income in retirement to access health services, transport and other amenities.

But as fate would have it, Zimbabweans are once again witnessing loss of value in pension fund savings.

Armed with lessons from 2008, the inflationary trend in the economy has ignited debate on alternative ways to hedge savings from inflation in the pensions and insurance industry.

Over the years, investment in equities or properties in pension funds managed by representative trustee bodies has been the norm.

This has left members blaming everything and everyone for the depreciation or demise of their investments.

Mr John Mwaimbodei (60), a pensioner said: “I regret placing my pension contributions in the hands of people who periodically presented graphs and tables of transactions I hardly understood. If we had mobilised ourselves and placed our money in a sustainable farming project, we could still be enjoying the fruits of our sweat.”

Given this background, a deliberate policy shift not only becomes necessary, but a need.

Unitised pensions quickly come to mind.

In a paper entitled ‘Investing Mutual Funds’, James Chen describes unitised pensions as a type of investment fund structure that uses pooled money to invest with individually reported unit values for investors.

Assets in the pool are managed for a specific objective of the individual, often with concentration in one stock.

Investors (individuals) are provided with a daily unitised value for their portion of the investment.

It is crucial to note that insurance companies in some countries use a unitised fund structure to segregate managed investments on behalf of policy-holders.

Pension funds may also use a type of unitised structure to offer convertible investments between defined benefit and defined contribution plans.

In this respect, participants are given the option to set up individual sub-accounts within a unitised structure. This gives investors greater flexibility to transfer and exchange assets within their plan and cushion themselves from vices such as value erosion.

Insurance companies may also use unitised funds.

The fund represents a collective investment with unit-linked fund options for the investors.

In a unit-linked fund, the investor designates investment in a specified unit-linked fund which is part of a broader collective investment.

Unit-linked fund investments vary across the fund. However, the investments of many unit-linked funds are collectively managed.

An investor receives reporting on their individual unit-linked fund investment, which may vary from the values of other funds in the collective. The total value of all the funds is reported as the total assets for the collective investment.

Generally, an investment company may also use a special unitised fund structure for fund management if it complies with securities regulation in their individual country — an arduous and long journey that the Zimbabwean pension and insurance sector might need to undertake as soon as yesterday.

With this type of fund, investors’ assets are pooled and the fund calculates a unit value for each participant. The unit value typically serves as a comparable value or a personal balance for the investor.

World over, unitised funds are typically offered as an alternative to mainstream investment options.

With a bias towards existing and practical investment opportunities in Zimbabwe like farming, investors should then get the chance to closely examine the prospectus of these types of funds to understand their structure.

They can provide for efficiencies when managing pooled assets investing in concentrated positions.

Commissioner of the Insurance and Pensions Commission (IPEC), Dr Grace Muradzikwa said: “The pensions and insurance sector is saddled with a number of challenges that include reduced disposable income owing to company closures, retrenchments, contribution arrears ($887 million), unclaimed benefits (153 000 members with unclaimed benefits to the tune of about $196 million), poor investment climate and low confidence owing to hyperinflationary legacy issues.”

Mrs Sandra Musevenzo, the Director General of the Zimbabwe Association of Pension Funds (ZAPF) said: “Due to inflation, questions are asked on whether pensions make sense — should people continue putting aside something for retirement? The short answer is “Yes”.

“There is one thing that is certain in life and that is we will either die before we reach retirement age or we die after retirement. Should we die while we are still working, then we must make sure that we have an insurance policy that pays out enough to look after our dependants. There is need to regularly review your cover amount to make sure it maintains value in real terms.

“If we are fortunate enough to live to retirement age then we will need a pension — so we must save something towards retirement,” said Mrs Sevenzo.

She said real assets such as equities and properties will always survive the economy’s turmoil.

“It is prudent to invest in value preserving assets or assets that can provide some form of hedge against inflation, like properties where rents can be adjusted accordingly, equities in companies that can increase their prices accordingly.

“Infrastructure projects such as solar farms and hydro-electricity are also worthy investments.”

Mrs Musevenzo said value preservation is of utmost importance.

“It is also important to ensure that the amount being put into the fund maintains its value in real terms. Shocks to the economy will always happen from time to time and the question is what then happens to those in retirement when those shocks happen?

“The answer is to perhaps build a social security system whereby the State promises some form of minimum pension to protect its citizens against economic shocks that could result in loss of value in the future.

“Having a safety net may rebuild confidence in the financial sector and encourage people to continue paying into their pension pots so that as a nation we can leverage on the savings to grow the economy into the middle income country by 2030.”

Harare-based actuarial specialist, Mr Tawanda Chituku said members need to own personal assets.

“It is not easy to achieve, but progressively over the next five years, members should possess their own assets. Members must be given that choice from the time they are employed.”

He said pensioners’ plight should be understood in the broader context of the prevailing economic environment.

Fortunately, things are now looking up for the pensions and insurance sector as inflation is forecast to start falling at a faster pace on the back of a stable and firming Zimbabwe dollar, which has benefited from the introduction of a systematic currency trading platform and measures to tighten controls on mobile money systems.

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