Pension funds dump outdated legislation

LOCAL pension funds have departed from an outdated method of accounting for investment assets as stipulated in the Pension and Provident Funds Act, a member of the insurance and pensions subcommittee at the Institute of Charted accountants of Zimbabwe (ICAZ) has revealed.
Hope Mulilo, an expert in Audit, International Financial Reporting Standards (IFRS), pensions and Social Security, said the industry had adopted “fair value” recognition of assets over the less appropriate “cost” treatment which is required by the Act which was gazetted in 1991.
She said recognition of assets using the “cost” method often results in discrepancies in valuation.
“The Pension and Provident Funds Act (Chapter 24:09) requires assets to be recognised at cost. There is a significant difference between the fair value of asset and the cost thereof as some assets were bought pre-dollarisation and adopted new cost values in 2009. These values do not fully reflect the performance of the fund. However, the basis of accounting applied by the pension fund industry is to fair value assets at year end, some pension funds are disclosing both the market value and the cost,” Mulilo said while making a presentation at an ICAZ seminar in Harare on Tuesday.
Historical cost accounting and fair value, accounting are two methods used to record the price or value of an asset.
Historical cost accounting is an accounting method in which the assets listed on a company’s financial statements are recorded based on the price at which the assets were acquired, whereas fair value measures the current market value of the asset.
The historical method is easier to implement, but the historical cost of an asset is not always the most appropriate.
According to IFRS, assets are supposed to be accounted for using the fair value method, but local pension funds are not entirely IFRS compliant because reporting in that industry is guided by the Act.
The industry prepares statements in accordance with the regulations of the Act which requires that the basis of accounting applied by the pension fund comprises generally accepted accounting practice as applied to retirement funds, which is IFRS with minor deviations which regrettably includes historical cost accounting.
A representative of the industry regulator, the Insurance and Pension Commission (IPEC) said the regulator does not enforce historical cost accounting because it is not an appropriate practice, even though it is the law.
“We cannot penalise them for doing something right, the inadequacies of the regulations of the Act with regards recognition of assets are so obvious,” said IPEC head of Insurance and Micro-Insurance, Munyaradzi Machinjika.
The commission of inquiry on conversion of pension values from the Zimbabwe dollar to the United States dollar, which was published in March this year, recommended the repealing of accounting of assets on a historical cost basis to align with international accounting sta