Curb pension fund boards incompetence

pension
Martin Tarusenga

The pension and insurance industry represent a significant part of the economy. As of the early 1990s the industry reported over 2 million contributors. With expert professional management and under good governance pension assets are expected to have grown significantly. Estimations have that the industry could well be over 12 billion with competent professional management. With increased consequent equity holdings, pension fund corporate ownership growth is expected to have increased, pension funds being expected (indeed encouraged) to use their power as shareholders to push for governance reforms at major corporations, as they are known to do elsewhere.

Pension fund actions in progressive economies include roles in the removals of incompetent corporation chief executives.
Such transparent developments, stimulating healthy competition in pension/insurance service provision and indeed the rest of the economy have not been part of Zimbabwe’s pension and insurance modus operandi. In essence pension/insurance investment performance has remained a suppressed subject, and away from public attention.

The apparent suppression of these funds’ investment performance could in part be the cause of the pensioner complaints that have now led to the pending Commission of Inquiry. It is therefore pertinent to understand why pension/insurance fund investment performance has not thus featured, considering that the two industries and the encompassing financial services sector were relatively sophisticated and rated one of the most diversified and well developed in Africa at independence in 1980.

The apparent pension fund investment performance suppression could be understood in the context of organisation of pension and insurance service provision in Zimbabwe, relative to typical such service provision.

Insurance companies and related service providers, have evolved to provide commercial services to manage funds that various members of the public collect from among themselves to insure against the adversities of life such as old age, death of bread winner, among others.

Examples of the members of the public pooling funds are members of the same occupation, say working for a given employer (the occupational pension schemes), and individual members subscribing to insurance products tailored for individuals.

In order to prevent misappropriation of such funds, the law, through regulations have required that such funds be recognised as private property, belonging to these members of the public.

In the latter regard contracts are required to be set up between the insurance companies and the various groups seeking to be insured against the adversities. Member contractual interests are therefore safeguarded through Trust laws, requiring members representation through appropriately skilled Boards of Trustees.

In corollary, the Trust laws place a fiduciary obligation on insurance firms to honour the contracts in a way that fulfils the original object of the contract, e.g. mitigating against old age infirmity.

Naturally the design of the contracts intrinsically require the members to contribute enough money, fixed ex ante, in order to realise the benefits, and require insurance companies to invest the contributions professionally, as an additional benefit financing strategy, and honour the contractual obligations.

Typically insurance companies invest in a range of asset classes to achieve investment performance targets agreed upon with Trustees, per accounting period. The asset classes include Government bonds, corporate bonds, in (equity) credit worthy corporations that require capital, and other (risk) investment instruments that allow them to implement their investment strategies effectively.

Insurance companies are therefore strictly accountable to members (the public) through the Boards of Trustees. Traditionally insurance companies therefore report back annually on their investment performance, often using such performance to market their services (if exceptionally good). Insurance companies and related service providers have, however, been observed to abuse this well meant organisation of pension/insurance service provision in order to misappropriate pension and insurance funds.

The service provision structures have therefore been made more comprehensive to include several control measures, not least explicitly stipulated mandates for Trustees, minimum qualifications for the Trustees, manner of Trustee appointments/election, Boards of Trustees performance standards and accountability thereof, investment performance practices and targets to be complied with by insurance companies, fees to be charged by insurance companies for services rendered, performance reporting to members.

It is, however, apparent that Zimbabwe pension/insurance service provision has not awaken to the need for enhanced service provision control structures as highlighted above.

It is for instance apparent that the failure of Boards of Trustees to act in the interests of pensioners, in the face of nationwide complains, was a consequence of several irregular circumstances not least that the Trustees do not understand that they should intervene, that they are typically and irregularly co-opted by employers onto these Boards, at the advice of service providers, for purposes of rubber stamping service provider desires and interests, that there are no legal measures stipulating minimum qualifications for Trustees, and therefore to prevent such Trustee co-opting of unskilled incompetent Trustees, that the Trustees are consciously relegating on their established duties in order to be paid Trustee fees.

In the circumstances it is apparent that boards of trustees have no control over funds’ investment decisions regarding
a) how to allocate the fund’s assets between stocks, bonds, cash, property, and other categories of assets;

b) selection of investment products within the latter asset categories, such as index funds, growth funds, large cap and small cap stocks, short-term or long-term bonds, among others and

c) choice of investment managers for the selected products and setting performance standards against which those managers will be measured.
In circumstances when pension Boards of Trustees have no clue that they have authority over their pension funds and should take charge, insurance companies have made it out that pension and insurance funds belong to them, and taken over all pension fund investment decisions as outlined above. In particular they have taken over decisions on which fund manager will be used for a given pension or insurance fund. They have therefore no incentive to set themselves exacting investment performance targets in the interests of pension fund members.

With full charge on which fund manager they can chose, insurance companies have taken to making more money from pension funds by selecting investment houses that they sponsor as fund managers, regardless the latter’s competence.

Each insurance company in Zimbabwe has therefore set up an investment management house to invest the funds that they administer i.e. tying down pension fund investment management to sister investment management companies and, rendering pension/insurance fund investment management in Zimbabwe very uncompetitive, and monopoly orientated (if not fraudulent), and detrimental for pensioners and policyholders.

In consequence pension fund investment performance in Zimbabwe, as reflected in the annual bonus declarations that insurance companies announce, is just a matter of course, meant to present an image that they are doing something, but with no tangible bearing on ultimate member benefits.

The bonus declarations are a collusion game with the public where the leading insurance company in Zimbabwe tends to lead bonus declaration, this to serve as a benchmark (say 20 percent), with the rest of the other insurance companies declaring bonuses, immediately after, and around this benchmark. Investigations show that these bonus declaration have over the years had no effect on pension benefits.

Boards of Trustees must be more competent and get insurance companies and investment houses on their feet.
Disclaimer: Opinions expressed herein are those of the author and do not represent those of the organisations that the author represent.

Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected]; Telephone; +263 (0)4 883057; Mobile; +263 (0)772 889 716

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