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Golden Sibanda Senior Business Reporter
Demand for commutation of pensions has risen dramatically in the last few years driven by the huge number of people laid off due to the harsh economic environment, Insurance and Pensions Commission has said.

IPEC said the demand by desperate members to commute their pensions led the commission to review the pension commutation framework as provided in Circular 4 and 8 of 2012 amended through statutory instrument 25 of 2016.

Commutation refers to giving up part or all of the pension payable from retirement or retrenchment in exchange for an immediate lump sum and varied factors are used to determine the amount of pension to be given up for the lump sum.

“The demand has been necessitated by an increase in members of pension funds being laid off, owing to the harsh economic environment. The aftermath of the July 17, 2015, Supreme Court ruling and failure by retrenched members to secure sustainable regular income has accelerated the requests for commutation,” IPEC said.

The insurance and pension regulator said the legislation now empowered trustees of pension funds to commute the whole or part of a member’s pension benefits for a lump sum if the total pension does not exceed US$600 annum.

Commuted pension

IPEC said commutation of pension was allowed if such payment does not result in the pension fund failing to pay regular monthly pensions due to illiquidity.

If the total to be commuted pension exceeds US$600 per annum, the trustees may be empowered to commute for a full lump sum portion, not exceeding one third of the pension as is elected.

However, this can only be done provided that the pension purchased by the resultant balance shall not be less than US$600.

In terms of the law, trustees of pension funds now have the power to authorise commutation of all pension balances below the US$600 threshold per annum provided the affected member is agreeable and the fund can afford the payout.

If the pension fund trustees are of the opinion that the fund cannot afford, the fund should a third of the pension, as a lump sum and the remainder as a pension. This should be commuted once the fund is in a good financial position to do so.

IPEC said the framework for treating commutations was being revised to enhance value realised by exiting fund members through broadening the criteria used for approval of payments, whilst ensuring the protection of the interests of remaining pension fund members.

Commutation guidelines

Guidelines on pension commutations have also been revised to reduce the turnaround time in the processing of applications for commutation of benefits.

As a guiding principle, IPEC said pension funds, through their board of trustees will allow full or partial commutation provided that the retrenched/retired member submits application within three years of retrenchment/retirement. 

In addition, the funds should be financially resilient to sustain the commutations and withdrawals without adversely affecting the interest of the members who remain in the fund, the liquidity requirements of the fund and the spread of fund assets across different asset classes.

Trustees of a pension fund will approve part or full commutation, upon application by a member for the withdrawal of regular and or preservation benefits after retirement/retrenchment for monthly pension lower than the prescribed threshold.

Also commutation is done if pension from the preservation benefit upon reaching age 55 is lower  than that prescribed in terms of the law, for medical reasons, educational requirements for children below the age of 24 years and paying off mortgage loans or finishing construction of dwelling homes.