Pension’s regulator proposes maximum limit on expense ratios…Opens up industry to competition
By Insurance24
HARARE, The Insurance and Pensions Commission is proposing setting maximum expense ratios, which the industry should comply with, in bid to cap costs of running pension funds.
The expense caps are being proposed at maximum of 5% expense to contribution ratio, Maximum of 1% expense to total asset ratio, for instances where a fund cannot operate within 5% expense to contribution ratio due to low contribution associated with maturity of fund or authorized contribution holiday (only for DB) or for whatever reason; and 15% total expenses to investment should be approved by the Insurance and Pensions Commission where the fund is unable to operate within the above thresholds, provided the return on investment is higher than the cost to income ratio.
“In doing this, IPEC is cognisant of the need to balance pension fund administrators and other service providers’ viability concerns and the need for accumulation of pension benefits to give a fair pension to fund members.
“In this regard the following expense caps are being proposed and these thresholds should be continually reviewed at least once every 3 years to ensure that they remain relevant,” Ipec said in a draft reform measures document.
The regulator note that in the calculation of expense ratio, Group Life Assurance premiums should not be accounted as part of expenses of running a pension fund in cases where these are funded by the sponsoring employer and not from the assets of the fund.
OPENS UP INDUSTRY TO COMPETITION
IPEC says has observed the abuse and haemorrhaging of pension funds by administrators in particular by most funds established through the collective bargaining agreements Collective Bargaining Agreements (CBAs).
It says most of the pension schemes that were established through CBAs, have exhibited serious corporate governance shortcomings characterised by conflict of interest transaction, related party transactions, poor data integrity and general poor service delivery.
Such industrial based pension funds are taking participating members for granted, owing to their compulsory membership to workers of particular industry or sector.
A participating employer on account of operating within an industry, within which there is the CBA governing the industry, is compelled to register all employees of such entities to become members of the fund.
“The situation has left members of fund without option in choosing a fund administrator, even when the administration of such industrial pension funds established through CBAs is poorly performing. In addition, it has been observed in some cases the fund administrative structures will be banked rolled by a few participating employers, who will be up to date with contributions, without much concerted efforts to collect contribution arrears due from the other participating employers.”
Ipec noted that the current situation of CBA created pension funds has in some cases, allowed inefficient, unaccountable pension funds and administrators to continue to exist at the expense of pension fund members.
The regulator added that this is even evidence suggesting that respective National Employment Councils and/or fund senior management had captured some of these funds for self-serving purposes.
“To deal with this undesirable conduct, it is recommended that the administration of pension funds business be open to competition. All administrators including the CBA created ones should compete for business with other administrators, insurers and the professional fund administrators.
“ In addition, the provisions that compel members in a particular industry to belong to a particular pension fund created through CBA, should be scrapped with immediate effect,” Ipec said.
However, the industry regulator said this should be done in an orderly manner to avoid loss of member values and take into account the constraints that may exist in particular those associated with the liquidity aspects of funds.
“The envisaged opening of the industry to competition will imply that while collective bargaining agreements (CBA) may establish the conditions of service, remuneration and even pension employer and employee contribution rates, it should be not be mandatory that employees of sponsoring employers become members of the pension fund affiliated to that industry CBA.
The existing stand-alone funds should be allowed to compete with other fund administrators for business and schemes members should have the option, at least once every 3 years, to move their schemes from one administrator or fund to another administrator offering better services and or benefits in all cases of defined benefit schemes.
Given that the proposed Tier 2 is compulsory, there is no risk that workers of any industry will be excluded from pension coverage above the one provided by NSSA. The issue then becomes one of participating employers choosing a pension fund or administrator, which better serves the interest of workers in respect of delivery of a better pension and service.
By the same token, other employers not necessarily from a similar industry can participate in a pension fund established by a CBA outside their industry of operation, if the trustees see the benefit of doing so.
Competition of this nature will entail that the inefficient administrators and schemes will lose business to the efficient and sound schemes that are better administered.
Whilst competition will allow individual participating entities in a fund to transfer their scheme to other funds or administrators, for the sake of orderliness in the market, a scheme will be allowed to transfer from one fund or administrator once within 3 years. Such transfer should be justified and communicated to members of the scheme and approved by the Insurance and Pensions Commission.
Competition coupled with enforcement of the proposed regulation of expenses, will result in the industry gravitating towards consolidation of the administration of funds into umbrella funds and insured funds, resulting in cost reduction that emanates from economies of scale associated with bigger entities.
