10 January 2013

Zimbabwe: Pensions Issue Contentious


The issue of payouts to pensioners and insurance policy holders has been contentious since the dollarisation of the economy in 2008. Finance Minister Tendai Biti last year demanded an explanation from the Insurance and Pensions Commission (IPEC) - the regulatory body - concerning paltry benefits being paid by pensions and insurance companies.

The companies allege that the contributions were wiped out by inflation. Some insurance policy holders who have contributed for more than 30 years have been receiving as little as US$8 payoffs per month.

This week, I am going to focus on the pension payouts by the National Social Security Authority.

Lately, knives have been out for NSSA over paying workers from across the board pensions of between US$40 and US$45 per month.

NSSA has since petitioned the Government to remove the ceiling on insurable earnings so it can raise its pension payouts. The insurable earnings ceiling currently stands at US$200. The joint employer and worker pension contributions are six percent of US$200 even if the worker earns much more than this figure. Government removed the ceiling in 2009, but reinstated it the following year. As a result workers across the board earn nearly the same pension from NSSA.

Last year, NSSA general Mr James Matiza said they had written to the Ministry of Finance requesting for an increase in the insurable earnings ceiling.

"We've called on the Government to address the issue as a matter of urgency. Previously, we recommended that the ceiling be removed in 2009, but it was reinstated in 2010," said Mr Matiza.

He said those pensioners that retired when the ceiling had been removed were earning pensions of up to US$1 500 per month. NSSA has been inundated with complaints from pensioners who feel that they are being short-changed.

Said Mr Matiza: "Retired workers should understand that there is nothing we can do about increasing payouts, unless the ceiling is removed. The better the ceiling, the better the pensions payout."

However, the ceiling was important when it came to remunerating low-income pensioners such as farm workers. This is because six percent deducted from farm wages is different from that deducted from high-income earners. In this regard, NSSA considered the solidarity aspect whereby contributions by high-income earners subsidise low-income earners. No wonder, the media has focused on pensions paid by NSSA.

However, the Press has failed to look at other pension funds. This is despite the fact that the same challenges that NSSA is facing are being experienced by other occupational pension scheme.

An informed comparison between the pension level paid by schemes and the NSSA scheme would put the issue of low pensions in perspective.

This would be particularly clear as occupational pension schemes receive contributions as high as 22,5 percent of earnings, without any earnings ceiling.

On the other hand, NSSA only receives six percent of earnings with an insurable earning ceiling of only US$200 per month.

Although some of these articles quoted "pension experts," these experts seem to have overlooked a number of issues in relation to manner in which the NSSA pension scheme is structured.

The "experts" appeared to be unaware that NSSA produces audited financial statements every year and operate according to specific rules. Pensioners, journalists and commentators seem to repeatedly make the same mistake of thinking that because NSSA has surplus funds, it should be able to increase pensions.

This overlooks the fact that current contributors are contributing towards their own pensions and these funds have to be invested to ensure there will be funds available for them when they retire.

NSSA cannot, as any pensions expert should know, use all the money it is receiving currently to settle pensions. Current surpluses have to be invested.

There are various financial models for social security schemes. One is the Pay-As-You-Go (PAYG) system.

This is where contributions are collected year by year and should match the expected expenditure of the year. There are no reserves to invest and the contribution rate increases annually.

There is a partial funding model that uses the general average premium contribution rate, which balances the present value of the total expected future benefits minus initial reserves. The rate of contribution in theory stays constant indefinitely.

The other partial funding model is the scaled premium method, where contribution rates are fixed and maintained at a constant level over a defined period.

Incomes and expenditure should be in actuarial balance over this period. The rate of contribution is higher for each subsequent defined equilibrium period. The scaled premium system is the one used by NSSA.

Partial funding simply implies that part of the contributions made today be invested in a fund. Pension increases do not happen because the pension fund has recorded a surplus in a particular year.

Any pension increases, for pension schemes in general and in the case of NSSA in particular, are recommended by actuaries. The statutes governing insurance and pension funds in Zimbabwe make actuarial advice mandatory. Technically speaking, the surplus is not for current pensioners, but belongs to the current contributors.

It should be invested and grown so that when they retire they receive enhanced pensions and reasonable minimum pensions.

All NSSA benefit and contribution reforms have been actuarially advised. This includes the re-denomination of pensions in United States dollars for pensioners who were retired during the Zimbabwe dollar period. The pensions were pegged at US$25 in April 2009.

It was subsequently reviewed upwards to US$40, which is also the current minimum NSSA retirement pension. The rules governing NSSA and the calculation of NSSA pensions are defined in the NSSA Act, Chapter 17:04 of 1989.

The regulations are contained in Statutory Instrument 393 of 1993. Turning to paltry pensions being paid by private companies, the Zimbabwe Pensions and Insurance Rights Trust (ZimPIRT) has been calling the companies to be transparent and deliver their promises to policyholders and pensioners.

Insurance companies say they were the "fall guy" as no one is talking about savings that were wiped in bank accounts. ZimPIRT general manager Mr Martin Tarusenga said that losses from a bank account could not be compared to that arising from a pension contract, as they were fundamentally different.

"The difference is the short term nature of bank accounts or contracts and the long term nature of insurance and pension contracts," said Mr Tarusenga.

"Showing anyone Zimbabwe dollars in their bank accounts deposited in 2008 is totally different from showing the individual an account with a monthly deposit made starting from the 1970s, as with insurance and pensions."

He reiterated that the monthly outlays into pension contracts for 10 to 30 or 40 years was clearly worth much more and could not just be ignored.

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