The State must compensate pensioners

via The State must compensate pensioners – New Zimbabwe 31/10/2015

RECENTLY, the President appointed a Commission of Inquiry to establish the processes and methods used to convert values of pensions and insurance policies at the time of dollarization in 2009. This was not only from considerations of the plight of pensioners, most of whom are wallowing in poverty but also from relentless pressure from Zimbabwe Pensions & Insurance Rights, an organisation formed to defend the rights of pensioners.

The work of the commission is not only important to resolve the plight of pensioners but also for future planning with the aim of avoiding the mistakes made in 2009 when future conversions are done at the time when a new Zimbabwe currency is re-introduced. Careful planning and study of interactions of interests of various stakeholders need to be modelled and all risks assessed, quantified and any possible mitigation strategies put in place.

Zimbabwe Pensions & Insurance Rights contends that the meagre pensions are a result of unethical conduct by pension funds and insurance companies at the time of conversion. In that way they seem to absolve the government from any obligation in respect of any pension liabilities. The question is; when should the government be held liable for compensation in systemic crises? Is our government not liable in this instance? What has been the experience in other countries where things have gone wrong?

That the process is to be done in retrospect, 6 years after conversion, exposes glaring shortcomings of statutory regulation in Zimbabwe. There seems to have been insufficient guidance by statutory bodies tasked with the oversight of the Insurance sectors. I am aware that there are allegations of conflict of interest as the Insurance and Pensions Commission (IPEC), the insurance regulatory body, is said to have many board members who double up as executives of insurance companies.

That a solution needs to be found for pensioners is not a subject of contention. This is a vulnerable group with no means livelihood other than from the pensions. The issue is about who is liable to provide compensation. I think the government, insurance companies and pension Fund sponsors have some obligations towards pensioners for different reasons and must all come to the party. In my opinion the greater responsibility must lie on the government’s shoulders.

The Government

The government is liable in the sense that they reneged on their key responsibility of the protection of customers of financial services. The crisis was due to forces arising from government failure than from insurance companies’ failure. In the UK, the government set up a Fund, when Equitable Life Insurance Company collapsed, to compensate those who suffered financial losses as a result of government maladministration which occurred in the regulation of Equitable Life. We would have expected the same type of accountability from our government.

The government cannot absolve itself from the systemic collapse that happened under its watch. In the same way the Zimbabwe Pensions & Insurance Rights should not seek to absolve government from the consequences of a crisis they were at the centre of. In many cases they caused the greatest risk through their actions, or inactions.

We know that the government had started a systematic withdrawal, in Zimbabwe dollars, of treasury bonds in the period leading to dollarization. These are the asset types most suited to guaranteed liabilities like annuities in payment given that there weren’t sufficient instruments to match pension liabilities at that time. This again might not have helped as well as the government did not pay even for the remaining few bonds in the market which were completely wiped off by hyperinflation. There was dishonesty on the part of the government.

The dollarization of the country’s economy was not planned; it was done in a hap-hazard way without taking into account the risks arising from interactions in the economy.  Even the Reserve Bank failed to immediately convert Zimbabwe dollar balances in bank accounts with the various banks into foreign currency.  It was characterised by the usual denial and inconsistent statements from government authorities. Government through the central bank only demonetised the Zim$ by paying meagre amounts in a process which was scheduled to end on 30 September 2015.  Even then, they could not fully compensate for losses.

Also events which took place, between 2008 and 2009, leading to the adoption of the multi-currency system are interesting. In November 2008 the government suspended trading on the Zimbabwe Stock exchange (ZSE). The suspension of trading on the ZSE meant that there were delays in the implementation of the conversion thereby increasing the risks involved due to possible mismatching.

Analysis of the industrial index shows that, when trading resumed under the US dollar regime, the index rose from about 55 on 19 February 2009 to about 155 in June 2009. This, to me, was a reflection that shares were undervalued and were correcting to fair values. The same was also true in all asset types like property whose values were subdued. This made the conversion values sensitive to the date of conversion because of the structure of the assets where most pensions assets were invested in some deposit administration Fund which was basically a balancing item after all other segregated Funds were removed.

Insurance Companies

Insurance companies have an obligation in respect of reasonable policyholder expectations as this helps to avoid adverse publicity and to restore confidence which is needed to rebuild the once vibrant industry. To me, this is where their greatest obligation lies in this pensions debate. Insurance executives must avoid projecting themselves as arrogant and heartless people with no compassion. This, they can do, by firstly availing sufficient information of how the conversion was carried out as there seem to be information asymmetry between the companies and the pensioners and, maybe secondly by proposing some form of Compensation Fund to help the plight of pensioners.

Having said that, I think insurance companies should share the blame only if they created surplus in their funds from underpaying policyholders. In this case it will be essential for government to legislate surplus apportionment investigations as was done in South Africa when legislation was introduced in 2001 to ascertain how surplus was created, and treated, in pension funds ending in payments to any members who may have been underpaid at exit or transfer to another Fund. Other than that I do not see how else the companies could make additional payments except if they were to reduce the assets covering other policy classes.

I am aware that the other problem that insurance companies had at that time was failure to clearly segregate assets for annuities and pension funds liabilities. These were often used as balancing items and kept in deposit administration funds (also called guaranteed Funds). This would have made it difficult to ascertain which assets belonged to which liabilities in terms of matching.

The failure to segregate assets between different generations of policies may have resulted in one generation or policy type subsidising other generations or types of policyholders. To that extent, the possibility of under-declaration of these assets at conversion existed. Even in this case it will be difficult to prove that different annuitants and policyholders were treated inequitably resulting in other policy classes benefiting unduly as the companies are unlikely to have kept sufficient data.

The timing of conversion I consider under “Government” above meant also that the pensions that were commuted as cash payments were undervalued as these were sensitive to the timing. The ones commuted in February 2009 would have been much lower than those commuted in June 2009, for instance. Insurers and pension Funds may have unfairly treated these pensioners by forcing them to commute when the market was low. Treating customers fairly is receiving much attention in regulation frameworks all over the world.
Arguments have been made that people still see the buildings that were purchased, or constructed by insurance companies using their Funds. That may seem a strong argument. But the reality is that during crises property market values plummet, first because there is no market and second because there is low occupancy rates.

Pension Fund Sponsors

Pension Fund sponsors (usually employers) of Defined Benefit type pensions may be responsible to meet valuation shortfalls because these benefits are defined unless they opted to convert to Defined Contribution type at the time of conversion, in which case the discussions above would apply. But many employers are still struggling from the effects of the economic decline, so in my opinion the responsibility reverts to the government for the reasons given above.

Conclusion

I hope the commission of inquiry will not go the way of other inquiries that were just buried and nothing was implemented from them. But in the end the responsibility for pensioners should be carried by both the State and to a lesser extent by insurance companies. In my opinion, there exists greater cause for the government to assume responsibility of this obligation more than the Reserve Bank of Zimbabwe (RBZ) Debt Assumption Bill, of which over $200million was given to senior Zanu PF members under the guise of agro-support.

I am sure the commission should recommend that the government sets up an integrated financial supervisory body in the like of the Financial Services Board (FSB) in South Africa and the Financial Services Authority (FSA) in UK which are more suited for complex financial systems.

There seem to be a case for the appointment of an appointed actuary for each pension Fund as a statutory requirement to give professional advice in matters to do with each Fund. This is in line with international practice. It is therefore my opinion that insurance companies did their best in the midst of too many constraints.

Mbango Sithole is a Zimbabwean actuarial specialist currently based in South Africa. The views given here are his personal opinion. Email: sithole70@yahoo.com.