Business

Investment of Pension Funds: Part 1

Pensions and Insurance Forum:
SAVING for retirement is an important social policy tool to avert old-age poverty.

It is widely recognised that a pension scheme represents a long-term contract between the employer as sponsor and the members. In this arrangement, employees give up part of the current salary through pension contributions in exchange for future retirement benefits.
It is, therefore important that pension funds are properly invested in order to get good returns for the pension scheme members.
To achieve this, we need an enabling environment and appropriate institutions to ‘grow’ pension funds. Government has established the environment for fund managers to flourish by enacting the Pension Scheme Regulation Act. Any company that desires to offer fund management services from the 235 registered pension schemes, needs to be registered by the Pensions and Insurance Authority (PIA). The Government through the PIA provides the oversight role for the fund managers. The PIA through prudential supervision monitors and ensures that the registered fund managers adhere to the necessary legislation and the agreements that they have with the trustees of the pension schemes.
The role of the fund manager can be summed up into two key roles: find investment opportunities for the scheme; and preserve accumulated assets to ensure that the scheme fulfils their retirement promise. The fund manager will have a contract with the scheme that gives the framework in which they will operate. The contract will also outline the schemes’ expectations and the dos and don’ts for the fund managers. For instance, the contract including the investment policy of the scheme may specify that a scheme for the church will not invest in investments that are in conflict with their religious beliefs like investments in brewing or investments that may displace or disadvantage the poor.
Further, when establishing the pension scheme, the trustees will have received actuarial advice that to achieve the desired retirement promise they need to achieve a certain investment return over the long term. This target is therefore a monitoring tool for both the trustees and the PIA.
Additionally, the fund managers are evaluated in the short term on a quarterly basis and in the long term on an annual cumulative basis. The asset manager has a duty to achieve the best possible return for the scheme. Suffice to say, where the trustees find that their fund manager has failed to achieve the desired target, it is incumbent on them to revisit their relationship by either rectifying the situation or terminating the contract.
Let me conclude by reminding the readers that one of the reasons the Pension Scheme Regulation Act No. 28 of 1996 (as amended by Act No. 27 of 2005) was enacted is to protect the interests of members and sponsors of occupational pension schemes. One of the most important outcomes of the Pension Scheme Regulation Act is that it instructs the trustees and their agents to maintain the real value of members benefits and preservation of pension rights. Preservation of members rights entails that accrued benefits cannot be changed in retrospect, meaning only future benefits can be changed.
Join us next week as we look at the most common investment portfolios for pension funds.
For comments, questions or clarifications send us an email: pia@pia.org.zm You can also visit our website www.pia.org.zm or our facebook page Pensions and Insurance Authority (PIAZambia)


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