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Whenever the National Social Security pension scheme is mentioned in the media, regardless of the subject, the article invariably states at some point that the national pension scheme pays paltry pensions.
Such articles give the impression that NSSA management sets pension levels. If it wanted to or if it managed funds better, it would be able to pay more, the articles insinuate.

In point of fact, the formula for calculating pensions is legally determined, as are minimum pension levels, through gazetted statutory instruments.
The national pension scheme is a Defined Benefit (DB) scheme. Benefits are based on a formula that takes into account the contributor’s number of insurance years and amount of insurable earnings during the same period or at retirement.

The benefit is guaranteed to everyone who meets the entitlement conditions. In the case of Zimbabwe’s national pension scheme, the benefit is defined by Section 27 of S.I. 393 of 1993 through a formula.

The formula, which is based on international best practice, is the number of years of contribution multiplied by insurable earnings at retirement multiplied by an accrual rate of 1,333 percent.

The insurable earnings component is often misunderstood. Insurable earnings refer to the earnings on which contributions are paid, not the contributor’s actual salary. Where there is an insurable earning ceiling, the insurable earnings of those earning below that ceiling will be their actual salary but the insurable earnings of those earning above that ceiling will be the ceiling figure.

At the pension scheme’s inception in 1994 the insurable earnings ceiling was Z$4 000. It remained at that level until October 2001, when it was raised to Z$7 000. Thereafter, it was increased in sympathy with inflation until September 2008, when it was completely removed.

The ceiling was reinstated in May 2010 at US$200, before being raised to US$700 in June 2013.
All these variations to the insurable earnings ceiling were legally implemented and have an impact on the amount of pensions the scheme can pay.

When one’s pension is calculated, what goes into the formula is the insurable earnings at retirement, not the individual’s actual salary.
The Table below shows what the pension would be of a contributor who joined the scheme at inception in October 1994 and retired at the end of May 2014 if there was no insurable earnings ceiling and no minimum pension in place and what it actually is with the current maximum insurable earnings limit of $700 in place.

It also shows what the percentage of earnings replacement rate is with the maximum insurable earnings level in place and what it would be if there was no maximum insurable earnings ceiling.

If the contributor earned $200 at retirement, using the defined benefit formula, the pension he/she would qualify for would be $52. Since this figure falls below the minimum pension of $60, it is raised to $60. This contributor would have been contributing $14 at retirement, i.e. seven percent of $200.

The pension of one who earned $300 would be $78,67. Anyone earning above the maximum insurable earnings ceiling of $700, would have received a pension of $183,56. If there was no ceiling, a person who earned $2 000 would have received a pension of $524,44 instead of the $183,56.

The point is that the pensions paid by NSSA are statutorily determined. They depend on the level of insurable earnings, the maximum level of which is also statutorily determined, and the period one would have contributed to the scheme.

The national pension scheme (NPS) has an insurable earnings replacement rate that is based on international standards, as indicated in the graph below. The difference from other schemes is the insurable earnings ceiling.

Talking Social Security is published weekly by the National Social Security Authority as a public service. There is also a weekly radio programme on social security, PaMheponeNssa/Emoyeni le NSSA, at 6.50 pm every Thursday on Radio Zimbabwe and Friday on National FM. Readers can e mail issues they would like dealt with in this column to [email protected] or text them to 0772 307913. Those with individual queries should contact their local NSSA office or telephone NSSA on (04) 706523/5, 706545/9, or 799030/1.