Ipec bets on compensation to lift confidence

The compensation is set to begin next year, after the government laid down the framework last month through Statutory Instrument 162 of 2023.

“The 2009 loss of value has contributed significantly to the low confidence that the industry is currently grappling with… we believe making good the compensation will help to restore confidence in insurance and pensions, which is key if the industry is to be sustainable,” Ipec commissioner Grace Muradzikwa told journalists this week.

“It is now all hands on deck to ensure that we successfully carry out this exercise for the benefit of all our stakeholders.”

Pension funds are expected to submit compensation proposals to Ipec before the end of this year and begin disbursements not later than a month after the regulator approves their schemes.

Ipec says it will not take longer than a month to approve plans, so disbursements could start as early as March 2024.

The regulator will also devise a supplementary compensation scheme and disbursements for this will be funded by the state.

Some players in the sector expect “challenges” in executing the plan, but Muradzikwa said Ipec believes the industry has the capacity to follow through.

“Ipec expects the industry to ensure that it compensates eligible members to the fullest extent practicable,” she said, adding that “Ipec does not expect non-compliance given that we have involved the industry throughout this exercise.

“However, the regulations have proactively provided penalties in the unexpected event of non-compliance. We will invoke the stated provisions, should it become necessary”.

A 2015 inquiry into currency conversions that followed the demonetisation of the domestic unit found that about US$3 billion was lost to inflation and the absence of a definitive valuation framework.

From pension funds and life insurers, the regulations primarily seek redress for valuation failures that may have occurred as a result of the conversion.

To calculate the prejudice to their members, funds are expected to appoint independent actuaries.

After approval of the compensation plan, the pension fund will publish in the media, the names of the members entitled to compensation.

They will also be expected to disclose a summary of the actuarial report on the implementation of its approved compensation scheme; and the individual member’s compensation amount and relevant pay-out timelines; as well as the complaints mechanism in place.

Among other things, the regulations also stipulate compound, discount and exchange rates to be used in the computations.

Zimbabwe Association of Pension Funds director-general, Sandra Musevenzo, said compensation would help restore confidence, but pointed out some “flaws” of the gazetted framework.

She said some provisions of the regulations “pierced and encroached” on the status of funds as separate legal entities from the board members.

“S.I 162 of 2023 might scare a lot of board members by giving them a cause to discontinue their fiduciary service and roles to pension funds.

“There are reputational, legal and financial risks to board members. The pension industry stands the risk of losing quality board members because of such fears.”

Under certain circumstances, funds will be required to pay a one percent annual levy on the total value of their assets, until compensation liabilities are extinguished and this, Musevenzo said would prejudice members.

She said there were restrictions in the forms of compensation provided for by the regulations—cash and fund assets.

“They did not give room for some employers or stakeholders who can chip in with compensatory contributions, assets or benefits from other sources such as land and shares.”

In terms of the regulations, all compensation will be converted and paid in Zimdollars.

“However, in the event that a fund is generating enough foreign currency from its investments, compensation may be made in that currency,” Muradzikwa said.

Musevenzo added: “A fair approach would have been the consideration of compensating in a stable foreign currency, such as the US dollar… this would provide members with a more reliable means to rebuild their financial security and protect against further inflation.

“Another consideration is the method of compensation. Simply providing a lump sum to compensate for the lost pension values might not be sufficient.

“It is essential to ensure that the compensation is structured in a way that allows affected members to have sustainable income for their retirement years,” Musevenzo said, adding: “One possibility is to establish a pension trust or fund where compensation is invested, and regular payments are made to the prejudiced members over time.

“This would help to provide a stable income stream, while protecting against future economic downturns.”

Meanwhile, Ipec says it is finalising the framework for compensation of insurance policyholders who were prejudiced by the currency change in 2009.