Non-pensionable allowances threaten funds

A HIGH prevalence of non-pensionable allowances in Zimbabwe has restrained contributions to funds, worsening liquidity challenges in the industry and creating a social security gap in the country, the Insurance and Pensions Commission (Ipec) says.
Non-pensionable payments have been on the rise since hyperinflation hit in 2019, after currency adjustments and have escalated lately due to Covid-19, with employers cushioning workers through allowances rather than salary increases.

IPEC commissioner, Gace Muradzikwa

“The practice is rampant. As you will appreciate, the country has been in hyperinflation mode since 2019. Most employers started awarding cost of living adjustments, while maintaining the basic salary at the same level,” Ipec commissioner Grace Muradzikwa told The Financial Gazette this week.
“In addition, some employers have been running dual payrolls, one denominated in local currency and the other in US$. The US$ payroll is generally regarded as temporary allowances, meant to cushion employees from the effects of inflation, hence will not be pensionable.”

Following the outbreak of the Covid-19 pandemic, most organisations are paying Covid-19 allowances, in local or foreign currency, which are non-pensionable as the virus is considered temporary, she added.
This practice erodes the value of pension contributions, given the hyperinflationary environment as salaries, which are pensionable, remain stagnant and results in the creation of pension gaps.

“To appreciate the extent of the problem, I can give a hypothetical example. If an employer does not review the basic salary regularly but keeps increasing cushioning allowances say by 20 times the basic salary, the opportunity cost to pension contribution is that factor as a percentage of pensionable salary that is defined in the pension fund rules,” she said.

“The effect of such a practice on employees is that while they can benefit now, on retirement they would not have something reasonable to meet their basic needs, a scenario that leads to old age poverty. Such a situation is described as a pension gap”.

The industry is already suffering due to low confidence issues emanating from legacy issues, particularly, the loss of value after the conversion of insurance and pension values from the Zimbabwe dollar to the United States dollar in 2009, while investments by the sector have been affected by the inflationary environment.
Inflation has, however, been falling after peaking at 837 percent in June, 2020 and now stands at 56 percent.

This comes as compliance with prescribed asset investments among insurers and pension funds is also falling due to the liquidity challenges.
The insurance and pensions industry is required to comply with the minimum required prescribed asset status thresholds, with the government providing investment options.

During the March quarter, an Ipec report for the period shows, pension funds, short-term insurers, life assurers, funeral assurers and life reinsurance were, on aggregate, non-compliant with the minimum prescribed asset ratios as stipulated by Statutory Instrument 206 of 2019.
Pension funds, with a minimum prescribed asset ratio of 20 percent, only managed 3,05 percent while life assurers and funeral assurers were both at 0,11 percent against requirements of 15 percent and 10 percent respectively. Life reinsurance companies reported a compliance ratio of 9,06 percent against the required 15 percent for the quarter. newsdesk@fingaz.co.zw