OUR senior business reporter, Clive Mphambela (CM) recently interviewed First Mutual Life (FML) Managing Director Ruth Ncube (RN) at the Zimbabwe Association of Pension Funds (ZAPF) congress in Victoria Falls. She gave an insight into how FML is playing a leading role in the pensions business in Zimbabwe. Below are excerpts.
What are the challenges facing pensioners and how should the industry respond to these?
The major challenge pensioners face today are low payouts against first, the cost of living as measured by the consumer price index (CPI) and second, the cost of accessing small pensions from the banks which impose high charges. In addition there is the issue of low asset bases for most pension funds post-dollarisation because insurers could not fully protect assets against the decline in value caused by the economic meltdown during the hyperinflation period. It is important to note that some statutory requirement asset classes such as prescribed assets and money market investments were totally lost as nothing has been recovered.
We also have seen pensioners being affected financially by the failure of various products to perform in line with expectations due to the change in operating environment. Examples include money market backed annuity where values have become nominal after the conversion from the Zimbabwe dollar to a multi-currency regime. This has resulted in scenarios where drawdowns made out of the funds are higher than the earned returns, thus implying payments are eating into capital.
It is important that the collective effort of industry, government and regulators be paramount in addressing some of the challenges faced by pensioners. There is clearly a need to review the minimum commutable pension from the current US$10 to a meaningful amount which is in line with living expenses. The employers must also embrace the need to take care of former employees by incresing pensions of those who served their companies for many years. There is also a need for a pension settlement solution that minimises transaction costs as has been implemented in Ghana, Botswana and India.
How is FML responding to the plight of pensioners today and in future?
FML has embarked on a countrywide campaign to educate employers on pension enhancement for pensioners. In addition we are also encouraging voluntary pension contributions from employees to ensure that their future is adequately covered. As FML we have also undertaken an active portfolio restructuring and re-alignment exercise on the remaining assets. This is expected to register a performance that can lead to pension increases. In 2011, we effected an increase of 25% and this year we gave an additional 15% as a way of responding to the plight of pensioners on our books.
Should we expect any new ways of doing things? Any new products from FML?
FML remains the pinnacle of innovation in life assurance in Zimbabwe. We continuously look for opportunities that make life, funeral and medical cover more affordable and accessible to the ordinary man. We have an array of new and refreshed packages that will definitely change the playing field and will touch the lives of all Zimbabweans, whether in towns, rural areas, farming areas or in the diaspora.
Our low income earners are most vulnerable to disease outbreaks, droughts and are usually found exposed in times of death and grief. Our technology driven solutions will inevitably help FML bring affordable products to everyone, everywhere at a very low cost. The solutions we have will essentially reduce the cost of doing business and this is expected to filter into lower premiums for funeral cover as well as medical cover. We also have a host of products that are expected to cushion pensioners such as the preservation packages aimed at the informal sector.
CM: Accumulating savings is a challenge for most people. What is the future of savings/endowment products in the market?
RN: The savings outlook has been very negative partially due to the low disposable incomes prevalent in the country as well as negative perceptions of the public towards the broad financial services sector. We expect an improvement in the performance of savings products; it should be highlighted the level of indebtedness of individuals will hamper the uptake of savings products going forward. We have seen that most individuals have multiple exposures with clothing retailers, durable goods retailers, money lenders and banks which are not sustainable at the current average monthly salary of US$250. This means very little is naturally left for savings products being offered. Moreover, the performance of the investment markets has been unsatisfactory for the past year and most players have slowed down on the marketing of savings products. As FML, we are however currently refreshing our savings product range with the help of our actuaries to ensure that clients continue to derive value from the products offered.
What reforms, if any, do you think are required to make the Zimbabwe pensions industry improve?
A number of reforms and ideas have been mooted since dollarisation and we are confident that some of them might be implemented soon. First, we need to come up with a recovery plan for the portion of assets wiped away in prescribed assets and money market portfolios. There is also a need to come up with a national position on funding the gap created by the loss in value of assets prior to dollarisation and replacement values have been mooted in a number of forums. We are positive that the exercise currently being pursued by the Insurance and Pensions Commission (Ipec) will bring the necessary solutions to this issue. Funding levels for defined benefit schemes also need close monitoring from a regulatory perspective to ensure that there are no problems in future.
Please share with us any other interesting perspectives?
From a pensions perspective, conversion issues continue to haunt the performance of the industry and there is need for the regulator to come up with a certification system which will put closure to this matter.
The industry appreciates the role it has to play in economic development through prescribed assets and we call upon the authorities to come up with properly designed prescribed assets fully underwritten by the government that industry can have complete confidence in. We have seen banks that floated some bills only last year facing serious challenges upon redemption, a situation which is untenable for policy-holder funds. These prescribed assets must also be priced correctly against inflation and should apply only to new money.
We also have been calling on the authorities to grant us permission to invest a part of our assets offshore to diversify the risks that saw assets losing most of their value during the pre-dollarisation era.
Finally, let me highlight that for most people, taking care of health, death and retirement needs is not a priority during the good times, but is an integral part of financial planning for every individual. First Mutual Life boasts a highly skilled personnel base whose expertise are instrumental to the culture of continuous innovation that will ensure consistent provision of relevant and quality products designed to suit everyone's financial planning.