Evolution of Pensions – Their Necessity in Nations and Delivery Risks Thereof in Africa
The true value of assets and the corresponding value of benefits (liabilities) of the Scheme are not known, as the Scheme does not publish such information.
HARARE, Zimbabwe—In Africa, a battery of descriptions can be used for the performance of pension provision and welfare systems generally, writes Martin Tarusenga.
Pension provision in Africa as a social insurance, remains unknown at a continent level and/or unimportant to the policymakers of these countries, not understood and/or unappreciated by policymakers.
Nevertheless, pensions and general welfare of people in Africa are necessary and critical, as everywhere else in the world – this is apart from being a major driver of economic development.
To avoid any confusion about the extent and limits of pension provision a taxonomy in welfare is invoked, where it is noted that pension/insurance provision is technically classified as social insurance within general welfare systems.
A brief of the importance of pension provision and welfare of citizens generally, is opportune to contextualise their performance within Africa.
Such a performance assessment, in turn, can help Africa provide incentives to policymakers to ensure that they perform better and alleviate any destitution associated with poor performance in these services.
Pension funds serve to mitigate the pain inflicted by adversities of old age, and disability among many other adversities of life.
Ancillary arrangements to modern pension schemes, such as group life assurance arrangements, and workers’ compensation insurance schemes, make pension provision more wholesome in the event of adversities such as the untimely death of family breadwinners, disability, and ill-health when income is no longer guaranteed.
The intrinsic necessity of pensions can be understood better from the existence of forms of pensions in every community and society from time immemorial and the history and evolution of pensions in such societies.
In so enunciating and identifying traditional forms of pensions in every community and society, it must immediately be noted that a dichotomy between the latter, and current modern forms of pension systems is cast.
In turn dialectic comparisons and discussions of the two are a necessity to establish the necessity of pensions, and the appropriateness of one form in given situations compared to the other forms in other situations.
In this article, this analysis is being conducted in the context of the African pension provision.
Without delving into details of this implied history and evolution of pensions, the observed concern of these communities over generations, of the welfare of their less endowed elderly, their disabled, those in ill-health, and the attendant care provided, is not in doubt.
The similarities of the circumstances under which such care is provided, to those circumstances under which benefits are obtained in the modern pension forms as recognised today, the similarities in benefits, among other similarities in features of the two provision (welfare) systems, reveal a congruency in which the traditional form falls neatly within the pension category, as known today – and vice versa.
It will be noted that the latter circumstances under which benefits become due, herein the adversities, are immanent in the lives of communities and societies – they are always with them.
On account of communities’ concerns and desires to protect those caught up in these adversities, progressive communities continuously seek to minimise the destitution of their elderly, their ill, etc - protection measures are therefore critically necessary for the communities.
The family system of protection, in particular the extended family unit that is prevalent in Africa, the traditional communal welfare system, has in reality been the earliest form of pensions.
However, in the wake of a fast-moving commercial world, where the family unit is no longer as strong, and in many cases broken, increasing reliance on modern financially based pension arrangements to mitigate the pains of life adversities has become necessary.
Progressive well-meaning governments have recognised the ever-present adversities inherent in societies, the risk of widespread unsightly destitution among the elderly, and caused them to put in place policies targeted to mitigate the pain of adversities to all citizens, in the form of pensions, and related provisions.
Such pension provisions have evolved to adopt exacting regulated management techniques to ensure pensions promised, are delivered fairly and equitably after long periods in which savings are made. Such periods can go up to 40 years.
These techniques include regular solvency management, investment management, accounting, various risk management techniques, etc, all in good corporate governance.
An examination of the performance of the pension provision in a few African countries, beginning with Rwanda and Zimbabwe, can typify African pension provision performance and shed light on the state of welfare systems in Africa about the three (3) criteria highlighted above – policymaker understanding of pensions provision and citizen welfare generally, policymaker appreciation of pensions and citizen welfare generally, policymaker commitment to, and prioritisation of pensions and citizens’ welfare generally.
Rwanda in Central Africa is a relatively young nation that takes seriously pensions and the welfare of its citizens in various adversities, in particular in old age. In “.. Extending pension coverage to the informal sector in Rwanda”, Ayendev Saha reports that “..Approximately 10% of Rwanda's workforce, largely public and private sector salaried employees, are covered by the mandatory, defined benefit (DB) pension program administered by the Rwanda Social Security Board (RSSB). 90% of the working population are (however) excluded.”
In recognition that the traditional reliance of the elderly in Rwanda on the family unit is no longer as strong, the Rwanda Government launched a fully funded Long-Term Saving Scheme (LTSS), called "EjoHeza" in December 2018.
It is a defined contribution scheme. Participation is voluntary targeting both permanent and temporary employees and covers both the formal and informal sectors.
Participation is through savings accounts administered by the RSSB. In setting up this scheme, the Rwanda Government also recognised and appreciated important secondary goals not least the need to reduce fiscal obligations, and the need to increase access to and participation in the financial sector, thus deepening and providing a source of stable capital to the financial markets.
As of December 2021, Rwanda has saved Rwf 23.2 billion in this informal sector pension scheme.
While it remains to be seen how expertly Rwanda Government manages the various risks faced by pension funds, not least data loss of both the DB Fund and LTSS, solvency risks of the DB Fund, investment management failure of both the DB Fund and LTSS, accounting, inflation risks and the costs thereof, it is evident that Rwanda prioritises pensions and the welfare of its citizens.
In Zimbabwe, it is evident that policymaker understanding of the role of social protection, in particular pensions provision and citizen welfare generally, is lacking and/or not a priority, policymaker appreciation of pensions and citizen welfare is generally, being viewed condescendingly similarly by the Government.
The dominant social insurance component of Zimbabwe's social protection system consisting of occupational pension schemes, National Social Security Authority (NSSA) Pension and Other Benefits Scheme and long-term life insurance, have all been abused having built up an admirable level of assets of no less than US$30 billion over many years.
With the wide acceptance of social insurance from the 1980s, participation in occupational pension funds was made and is still a condition of formal sector employment.
Reports of the then Registrar of Pensions reveal occupational pension fund membership increasing to a peak from 720,000 in 1987, to 1,200,000 in 2001, the pension schemes housing this membership increasing from 1,500 schemes to 2,700 schemes, over the same period.
With an asset base of US$3 billion in 1992 and an average annual pension contribution of US$230 million from 1987 to 1998, it is estimated that assets under management by insurance companies as administrators of pension funds should be no less than US$20 billion as at 2024 assuming a conservative constant yearly investment return of 5%.
Insurance companies on the one hand sold long-term insurance policies en masse in the 1980’s and 1990s.
With negligible lapses, negligible maturities, etc during the 1980s/1990s, the total number of policies on the books of insurance companies stood at 2,5 million, as of 2003; the corresponding accumulated yearly net incomes adjusted for interest at 5%, working out to US$13 billion as at 2003.
With a compulsory 6% of insured earnings pension contribution rate into this defined benefit scheme, for all formal sector employees at introduction in 1994, the NSSA Pension and Other Benefits Scheme (the NSSA Scheme) is reported in the media to be receiving millions per month in US$, since inception in 1994.
The true value of assets and the corresponding value of benefits (liabilities) of the Scheme are not known, as the Scheme does not publish such information.
Regardless of this trove of assets, social insurance in Zimbabwe has built up over many years, pensioners nationwide were shocked when they were entitled to paltry pension benefits (if at all) in the wake of a surge of maturities from around 2004/2005.
Most of those who had been in active employment since the early 1980s (on or just after independence) attained retirement ages as stipulated in various agreements and statutes.
Our next article will detail errors, mistakes and misgovernance in social protection in Zimbabwe and progress and shortcomings in some select countries in Africa.
In the face of the destitution of the elderly and those in other adversities, governments in Zimbabwe and Africa generally should be more sensitive and prevent destitution from incompetence and misgovernance of social protection schemes.
Regional and continental bodies such as the Southern African Development Community (SADC), and African Union (AU), among others, should have explicit exacting policies to ensure that social protection in its various forms thrives.
*Martin Tarusenga is the General Manager and Consultant of Zimbabwe Pensions & Insurance Rights. Opinions expressed herein are those of the author and do not in any way represent those of the organisations that the author represents.