Pensions and Insurance Forum with DOREEN SILUNGWE
PENSION is one of the least discussed topics despite its importance. Most of us wait until it is too late to start looking at our pension.
I have met many people who have told me that they have never seen both the National Pension Scheme Authority (NAPSA) benefit statement and their respective pension scheme annual benefit statement.
Even when we are about to get a job, we do not ask whether it’s actually pensionable or not.
A few weeks ago, I received a message on our Facebook page from a concerned citizen who expressed his frustration with the pension system in Zambia. He wondered why pensioners now receive their pension monthly instead of a lump sum. This compelled me to write this article, which will focus on the definition of a pension, its importance and other critical general information on pensions.
WHAT IS A PENSION?
A pension is simply a form of saving for retirement. It is a stream of income (not a lump sum) that is paid usually when one attains retirement, but it can also be paid to children. Widows and widowers may also receive the late spouses’ pension. A pension replaces the income that you used to get before retirement.
WHAT SORT OF PENSIONS DO WE HAVE IN ZAMBIA?
We have two basic types of pensions: the government schemes (statutory pensions), which are Local Superannuation Fund (LASF), Public Service Pension Fund (PSPF), Workers Compensation Fund Control Board (WCFCB) and NAPSA; and we also have occupational (private) pension schemes. Insurance companies also have pension plans for individuals.
WHAT IS A PENSION SCHEME?
It is an arrangement under which persons are entitled to benefits upon retirement or upon death or termination of employment or upon the occurrence of such events as specified in law or the document establishing a pension scheme.
WHAT ARE THE TYPES OF PENSION SCHEME DESIGN?
A pension scheme can be designed as a defined benefit scheme (DB) or defined contribution (DC) or a hybrid.
A defined benefit scheme is a pension scheme where the retirement benefit payable is based on a pre-determined formula.
On the other hand, a defined contribution scheme is a pension scheme where contributions into the scheme are pre-determined implying that the benefit is uncertain as it will depend on accumulated contributions and investment earnings. The last one is a hybrid, which has both features of a DB and DC.
WHY CONTRIBUTE TO A PENSION SCHEME?
The main reason for a pension scheme is to save for retirement, but as a social protection instrument, a pension scheme also offers benefits when one loses employment as a result of ill health, death or just wishes to take up other activities. Viewing one’s life from a life perspective you see that one’s saving opportunities are at peak when in employment, therefore part of the excess income (surplus over consumption of members’ household) is deferred or postponed to retirement through a pension scheme.
Pensionable employment also provides for job security as it gives you certainty that you have a job over a long period in excess of 30 years.
The argument is that some people may have an opportunity to accumulate wealth without using pension schemes – perhaps through their business ventures or other assets.
However, most people will want to supplement what they have with some form of pension scheme. Many employers also take the view that, while their employees are working, they should be building up an entitlement to a pension when they retire.
HOW DOES A PENSION SCHEME WORK?
A pension scheme has two stages, namely accumulation and de-accumulation stage. During the accumulation stage, contributions from members are paid into the fund scheme) and these funds are invested. During this stage, the individual starts receiving a pension and the fund value begins to decline.
WHO MANAGES THE PENSION SCHEME?
The pension scheme has trustees with representation from both employers and employees. The trustees are entrusted with the management and control function of the scheme.
However, trustees appoint fund managers, administrators or qualified individuals to perform the duties of a fund manager and administrator.
A fund manager is a company that has a duty of investing funds of the scheme on behalf of the trustees. They place, monitor and call off investments on instruction from the trustees.
An administrator is the one who does the administration part of the scheme by paying out benefits, keeping scheme records and organising meetings for the trustees.
WHERE ARE PENSION FUNDS INVESTED?
Pension funds are invested in various instruments such as government bonds, corporate bonds, property, fixed deposits and cash deposits.
HOW SECURE ARE PENSION INVESTMENTS?
Trustees and their agents (fund manager and administrator) are required by law to ensure that investments are only made in secure and profitable investments. Therefore, if the trustees follow the law, pension investments are secure.
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