PIA FORUM with SAMSON HAKAKOLE
A Pension trust is a legal arrangement under which trustees hold the assets of the pension scheme in a trust fund for the benefit of the members of the scheme and their dependants, and for the main purpose of providing income in retirement. Ideally, a pension schemeâ€™s assets are separated from the employers business for the main reason of ensuring that these assets will be available to pay membersâ€™ pensions whether or not the employer stays in business.
Essentially, a trusteeâ€™s role in a pension fund is to: hold the trustee assets; invest the assets prudently in accordance with the terms of the trust; collect the members contributions as required by the terms of the trust; and ultimatelyâ€” to pay benefits in accordance with the terms of the trust. Under the Pensions Act and the trust deed in Zambia, trustees are legally required to be familiar with the pension schemeâ€™s documentation and to have a good understanding of the legal, funding and investment obligations relating to the pension plan in order to appropriately manage the assets of the membersâ€™ pension scheme adequately. In addition, they are required to keep records of the operations of the pension scheme to show the Pensions regulator that they have complied with the regulations as stipulated under the Act.
Most importantly, trustees are charged with the mandate of determining the investment strategy of the particular pension scheme they manage. Trustees are entrusted with the primary responsibility of ensuring that they â€˜maximize returns within an acceptable level of risk.They have to ensure that the assets they are mandated to oversee are sufficient to meet the pension payments without depending so much on the sponsoring employer of the pension plan for anything more than the current level of contributions. In turn, the beneficiaries of the scheme hope that the maximum return will be made on assets so that they can have the prospect of improved pension benefits upon their retirement. As a result, trustees continue to face the constant pressure of being the notch performers as they are compared to peer pension funds, and are subject to disapproval from both their members and the sponsoring employer of the scheme should they underperform.
Should the trustees adopt a very high-risk strategy with a probability of hitting it big – attaining high returns in order to meet the expectations of the members, they also risk making significant losses. In the case of a defined benefit (DB) pension plan, the risk is somewhat mitigated as trustees can rely on the obligation of the sponsoring employer to off-set any shortfall should the investment go wrong. On the other hand, itâ€™s worth noting that the cost of any losses suffered in the case of a defined contribution (DC) pension plan is ultimately shouldered by the participating membersâ€™ on that plan. A brief distinction of the two pension plans is that a DB pension plan is a type of plan in which the sponsoring employer promises a specified benefit on retirement that is predetermined by a formula based on the memberâ€™s earning history, tenure of service and age; and a DC pension plan is a one where the benefits on retirement are based on amounts credited to members accounts plus any investment earnings on the money in these accounts accrued over the length of their participation on this plan. To avoid bearing the cost of losses, in recent years, sponsoring employers of pension plans has favoured a shift towards defined contributions pension plans from defined benefit pension plans.
The Pensions Act prescribes that trustees be clearly dissociated from the sponsoring employers of the pension plans. While the sponsoring employers are responsible for ensuring that contributions are remitted to the scheme, the trustees hold the legal title of the pension scheme assets and have stringent legal duties to ensure that those assets are used to provide benefits in accordance with the terms of the trust. In a nutshell, trustees offer an invaluable service to the schemes on which they serve and are an important body of the schemes and are mandated to ensure that the membersâ€™ rights to their assets are protected.
For more information surrounding issues of insurance and pensions, kindly visit the Pensions & Insurance Authorityâ€™s website at www.pia.org.zm
*The author is an Inspector in the Pensions Supervision Department of the Pensions and Insurance Authority.
PIA FORUM with SAMSON HAKAKOLE