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Martin Tarusenga
The article on defined benefit and defined contribution pension schemes that appeared in the Friday’s issue of the herald raised significant interest from anxious pensioners whose pension schemes began as defined benefit schemes and later converted to defined contribution schemes. The article outlined pension benefit calculations from the defined benefit pension scheme and from the defined contribution pension schemes, in the process illustrating how insurance companies, in apparent collaboration with the Insurance and Pension Commission (IPEC) are, though corruption and incompetency, entitling pensioners way below their full rightful benefits.

Naturally pensioners that participated in defined contribution pension scheme that started as defined benefit pension scheme felt left out by the article.

It turns out that a very large number of pension funds in Zimbabwe started off life as defined benefit pension arrangements, until the period between 1999 and 2003, when many of them converted to defined contribution pension arrangements. In established principles and practices of pension fund management, benefits accrued under the former defined benefit arrangements should be preserved in their original purchasing power terms until the member is due to receive the benefits at the retirement age stipulated by the pension fund. The defined benefit pension arrangement provides benefits stipulated as a percentage of the member’s final pre-retirement earnings for each year that the member participated in the pension fund — the design objective of this scheme type being to provide pension benefits that increase as the member’s participation period increases, and as the member’s earnings increase in real purchasing power terms, with career progression.

Members signing up to this contract type, sign up for this very objective to be realised. The article discussed benefits that a real member of a pensioner group should have secured under either of the two schemes versus the paltry benefits that he was entitled by the insurance company underwriting their pension scheme.

The member started off their work career as a general hand in the manufacturing/industrial sectors, and began participating in the incumbent occupational pension fund some 33 years ago, contributing at 7,5 percent of their monthly earnings.

The insurance company in question entitled them only $3 580. This member’s pension fund actually started off as a defined benefit arrangement with a 2 percent final earnings based accrual, and converted to defined contribution as at January 1, 2000. Ignoring any temporary distortions that inflation and other mishaps may have wrought on especially earnings of this member, the real US$ valued earnings that should be used in calculating this member’s pension should be that which meet the original defined benefit design intention.

This earning, at the time of the conversion, would have been anticipated at the time the member joined the fund — the practice of projecting earnings, and hence of using earnings scenarios, actually constitutes part of pension contract design procedures, when members sign up. Having started in a monthly earnings band of Zim $40 to Zim $100 (then Rhodesia dollar), in 1978, this member is anticipated to have been earning about $350 for the period 1999 /2000 in real (US$) terms — as can be seen in the plot above.

In fact this member was then earning an inflation distorted monthly salary of Zim $10 547 (or US$170) — which earnings had very little to do with his participation and benefit accrual in the Fund for the previous 22 years to January 1, 2000.

Using the undistorted anticipated monthly $350 earnings, and a participation period to January 1, 2000 of about 22 years, this member had then accrued a monthly pension of $154, to be payable for life at the pension fund stipulated retirement age of 65 years.

The monthly pension of $154 would require a pot of assets (capital) amounting to $24 116 at the point he attained 65 years, assuming a life expectancy appropriate for this member and after adjustment for investment returns obtainable after retirement. As at the date of conversion to defined contribution scheme (January 1, 2000), this capital requirement at age 65, has a present value of about $8 279 when adjusted for investment returns achievable between January 1, 2000 and the point the member attains age 65, after adjustment for survival probability to age 65.

This $8 279 present value (or reserve) as at January 1, 2000, is the amount that the Fund should have held in its coffers in order to pay a monthly pension of $154 to this member from age 65 — for his participation in the defined benefit arrangement up to January 2000. This member may (often discretionarily) be penalised for premature retirement depending on the rules of the fund.

The $3 580 the insurance company entitled this member is far less than the capital this member had accumulated by January 1, 2000, before he had even begun participating in the new converted defined contribution pension arrangement. In fact, almost all insurance companies in Zimbabwe disregarded the requirement to preserve benefits accrued under pension arrangements in accordance with the design intention of the contracts in question, instead accumulating and adding contributions made in First Zim dollar denominations, in Second Zim dollar denominations, Third and Fourth Zim dollar denominations for defined contribution funds, ignoring the reality that these were essentially different currencies with different underlying real (US dollar) values, which could not be added together as if they are like for like.

It is apparent this disregard of pension benefit preservation, occurred as a consequence of both corruption and incompetency. The result for defined contribution funds for adding together contributions made in different “currencies”, was that the Zim dollar member accumulations advised by insurance companies systematically ballooned in Zim dollar terms, but (surprisingly) dwindled in real US$ terms, with no bearing whatsoever to the assets/investments that the contributions accumulated in reality, within the set of investments made for pension funds, such as property, equities, Government bonds, among others, that were returning handsomely for most of the time until the early 2000s.

As a consequence, pensioners were entitled paltry benefits if at all. Government should reinvigorate its new move to eradicate corruption and incompetency via the National Code of Corporate Governance.

Martin Tarusenga is General Manager of Zimbabwe Pensions & Insurance Rights, email, [email protected] ; telephone; +263 (0)4 883057; Mobile; +263 (0)772 889 716. Opinions expressed herein are those of the author and do not represent those of the organisations that the author represents.