eBusiness Weekly
Nelson Gahadza
The country’s pensions industry overall risk rating is considered to be at a medium risk level despite investment and solvency risk remaining high.
Pension fund investment risk comes from three main sources namely risk that the fund will fall in value, risk that the pension fund’s returns will not keep pace with inflation and risk that the pension fund does not perform well enough to keep pace with the growth in the cost of providing pension
Insurance and pensions industry regulator, Ipec in its 2022 pensions report said the financial soundness of the sector was determined to be at a medium risk level but there are several risks that still remain high.
Solvency risk applies to defined benefit plans and it is the risk that the pension fund’s assets are insufficient to meet its liabilities.
Ipec said based on the assessment of the industry’s position, this risk was high on account of the industry’s weighted average funding level, which was determined to be lower than the regulatory minimum of 75 percent.
“The Commission will continue to engage the funds with low funding levels to ensure that the sponsoring employers inject capital into the pension funds to offset the actuarial deficit,” read part of the report.
Ipec said following calculation of the investment performance for the period ended December 31, 2022, investment risk was rated as medium.
The regulator said investment risk was mainly driven by industry’s two major asset classes, which are investment property and quoted equities.
“Whilst investment property outperformed inflation, quoted equities did not perform well due to the bearish performance of the stock market,” it said.
Investment risk is the risk that investment returns are either negative or lower than inflation.
Ipec said in terms of market risk, the bulk of the assets being invested in 2 asset classes of investment property and equities raises the risk that if these two asset classes do not perform well, then the funds will be negatively affected.
0On credit risk, which is the risk of default on a debt by debtors of the pensions industry, Ipec said given that the bonds, rental arrears, contribution arrears and other debts of the industry are a low proportion of the total assets, the risk was rated as low.
Agency risk is the risk that costs of services provided to the industry will be high such that they take a significant portion of the assets, which will result in members being financially prejudiced.
During the year under review, the risk was rated to be high as average costs of expenses were above the issued regulatory thresholds.
In terms of liquidity risk which is the risk of failure by the industry to make payments as they fall due because of lack of liquid assets that can be easily converted to cash was rated to be low as current liabilities could be met with the available current assets.
However, for the period to December 2022, the pensions industry total expenditure was $89,52 billion. and of that amount $68,33 billion went towards the payment of benefits.
Total administrative expenses incurred were $17,52 billion and were mainly driven by administration fees, asset management fees and staff costs, which constituted 67,84 percent of the administration expenses.
“In order to reduce the expenses, the Commission will continue to enforce compliance with the expenses framework,” Ipec said.
The total income for the period under review was $705,36 billion compared to $174,57 billion for the same period during the previous year.
Of the $705,36 billion, total income earned in foreign currency was US$47,23 million, which is equivalent to $31,72 billion, thus constituting 4,49 percent of the industry’s total income.
