ALLAN GREENBLO: Savings destruction: lessons from Zimbabwe
We should worry about where and how to start with financial education that will work
The need for urgency in the initiation and acceleration of mass programmes for consumer financial education cannot be sufficiently stressed. Aside from the continuing reasons – to encourage savings and guide selection of appropriate products – there’s another imperative.
It’s derived from SA’s political hothouse. The heat is perpetually intensified most prominently by ANC secretary-general Ace Magashule and EFF leader Julius Malema.
Their agendas are ominously devoid of adverse consequences for themselves but demonstrably apocalyptic for everybody else. Their rhetoric can only gain traction for as long as the levels of mass financial education remain as low as they are.
Eerily articulated is the populism mischievously dressed as a respectable “leftist” alternative to the “neoliberalism” that embraces fiscal constraint. The loudness of the shouts, proportionate to the hollowness of the thoughts, dangerously gains popular appeal when the solution to the shortage of money is purported to be the printing of money.
This is proclaimed in vote-catching calls for nationalisation of the Reserve Bank or, put differently, for its constitutional independence from political accountability to be replaced by a regime of political popularity. At the forefront of resistance must be not only the Bank itself and the National Treasury, which need all the support they can get, but also the financial institutions which serve as custodians for millions of people’s savings.
So much the better if only those people, with over R4-trillion of their money held in retirement funds, were organised to speak for themselves. That they aren’t, and that many are none the wiser of impacts on their own interests, highlights systemic defects: first, that there is no organisation to mobilise a groundswell; second, that the low level of financial literacy is low-hanging fruit for the pickings of populism.
Make no mistake that the low level is pervasive. When a member-elected trustee of a R30bn retirement fund asks at a presentation why he should worry about inflation, worry. Then worry some more. Worry about where and how to start with financial education that will work.
In recent years, SA’s inflation has been liveable towards the lower band of single digits. The bulwarks are the Bank and Treasury. Flip them to control by populists, arguing from factions within and at extremes of the ruling party, for the consequences to be entirely predictable.
A crystal ball is provided by the Zimbabwe commission of inquiry into insurance and pension values. Instituted by then president Robert Mugabe in 2007 and gazetted by current president Emmerson Mnangagwa last year, the report is a supreme example of the situation into which SA dare not be seduced.
Damned for Mugabe having eschewed austerity, then damned for Mnangagwa having introduced it too late, Zimbabwe was recently engulfed in violent protests against the unaffordability of such basics as food and fuel. Like bankruptcy, inflation begins slowly and then balloons to the hyper-dimensions.
In Zimbabwe it has led to a full-blown humanitarian calamity. Warnings in the collapse of a country can be no closer to SA than from across the Limpopo. Having begun decades ago with modest government interventions on pensions, what’s not to signal messages down south?
The 423-page report of the Zimbabwe commission, chaired by a retired judge, struggled to produce viable recommendations for remedy of the currency crisis at the heart of savings destruction. But mainly it shows how quickly and easily events can run out of control, even in financial institutions and professional bodies. And in the regulator too.
Bluntly, the value of pensions has been shot to pieces. Basically, it followed the creep of an inflation eventually so rampant as to be unmanageable.
The commission was set up, it records, “against a background of widespread public complaints over the perceived lack of transparency and the massive loss of value by policyholders and pension fund members in the conversion of insurance and pension values from the ZW$ to the US$ at the inception of the multicurrency regime in 2009”.
This multicurrency system was intended to restore macroeconomic stability. It failed. By the time of the system’s introduction, inflation had already hit a record of “over 231-million percent”.
This had taken place, the report points out in a bit that will resonate uncomfortably, when there was fiscal unsustainability due to:
- Erosion of the tax base;
- Debt overhang;
- Widespread underemployment;
- Informalisation of the economy; and
- Endemic poverty.
All of which have subsequently worsened; populists, take note.
The government did not demonetise ZW$ balances at the time of conversion. Neither did it provide policy guidance on how insurance and pension values would be affected. Neither, in the “free-for-all scenario” that developed, did it protect the rights and reasonable benefit expectations of policyholders and pension fund members.
There were also failures on the part of the regulator to provide guidance and protect values. As if in mitigation, the report’s assessment was that at the time the Insurance & Pensions Commission suffered from skills deficiencies. Nonetheless, it was badly governed.
Private sector industry and professional bodies fell down too, and worse. Evidence was found of collusive behaviour “through the associations which should generally have quasi-regulatory functions and advocating for prudent behaviour among their membership”.
Many members of the public held the view that the commission should have been established earlier to address their poverty, misery and loss of dignity. Even taking into account the reality of hyperinflation, said the report, it is inconceivable that all their insurance or pension contributions could be lost since a significant proportion had been invested in real assets prior to dollarisation and hyperinflation.
Some explanations from the report that reflect poorly on governance:
- While incomplete and inconsistent asset data submissions to the commission could have been a genuine failure to maintain the data as required, the possibility of the motive to conceal incriminating evidence remains;
- The pension industry lost asset value through nonremittance by employers of employees’ pension contributions;
- In most of the larger insurance groups, shareholder assets were growing at much faster rates at the expense of pension and insurance funds’ assets;
- Due to lack of appreciation of pension matters, pension funds’ trustee boards were not in control of the assets for which they’re stewards.
And there’s a real slammer against the insurance and pension industry: “The expenses paid out of premiums were too high, and in some cases exceeded the contributions received. The industry degenerated into a sinkhole. Policyholders and pension fund members contributed to sustain the lavish lifestyles of the administrators without any return to the policyholders and pension fund members. The regulator’s failure to reign in the industry expenses perpetuated the haemorrhaging, resulting in predatory expense structures averaging 81% of total premiums and contributions during the period from 2009 to 2014.”
Amid the range of comprehensive findings and recommendations, two pertinent conclusions in the commission’s words:
- Notwithstanding the loss of value due to poor industry practices, wherein compensation will be expected from the private sector, the largest reason for the loss of value was the operating environment characterised by very high levels of inflation. There remains a large number of impoverished policyholders and pensioners who lost all their savings due to inflation;
- Consumer education and activism play an important role in enhancing the accountability of the industry to the policyholders and contributors by empowering market players with relevant information and knowledge of financial products and services available, as well as promoting financial literacy.
In all, the report is a presentation of what happens when chaos reigns. With hyperinflation, the doors fling open for greed and exploitation. Who benefits and who suffers? Let the populists answer to the people, honestly if possible, or have confidence that the custodians of South Africans’ savings will do a better job of awakening them.
That’s the textbook for the defeat of doomsday.
- Allan Greenblo is editorial director of Today’s Trustee (www.totrust.co.za), a quarterly magazine mainly for the principal officers and trustees of SA retirement funds.
Scrutinising the commission report, the Zimbabwean Life Offices Association (LOA), which includes Old Mutual, listed additional issues to have caused value loss.
Top of its list – compiled by African Actuarial Consultants and Alexander Forbes – was that in the 1990s the government had prescribed fixed-interest assets that had to be held by insurance and pension entities. These assets lost significant value as inflation gained momentum.
That the entities had also been prohibited from investing offshore or in foreign currencies further constrained diversification strategies. The prohibition forced the entities into overvalued assets unrelated to fundamentals.
Because the government was committed to repay coupons and redemption proceeds on the prescribed bonds, the LOA took legal opinion on the liability of government to pay compensation. The opinion turned out to be that “everything” is left at the discretion of the president, who’s not bound either by the findings and recommendations of the commission’s report or to take any action on its receipt.
Martha Mukamba joined the Zimbabwe Family Planning Pension Scheme, administered by ZB Life Assurance, in 1981. When she exited in 2012, after 31 years’ service, she received a one-off payment of US$186.39.
This amount was far lower than the equivalent of US$1,118 which comprised her total contributions for just one year in 1981 when the fund was still a defined-benefit scheme. In that year alone, the employer and employee contributions were equivalent to US$99.29 per month.
Lungu Yotham Morrison joined the Selfguard Preservation Fund, also administered by ZB Life, in 1995. At the time he injected ZW$1,947, then equivalent to US$230, into the fund.
Having participated in the fund for 14 years, on exit he received a once-off payment of US$0.83.
From the report:
The hearings brought to the fore the fact that in some cases the boards of trustees did not have control over assets of the pension funds, thus exposing pensioners to unscrupulous employers and pension fund administrators. Most of the trustees representing employees were allegedly manipulated by the employer representatives who normally chair the boards and exert their influence to the detriment of pension contributors.
Furthermore, most of the trustees were appointed from a worker-representative perspective without due regard to their knowledge of pension business and appropriate qualifications.
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