REVIEW OF THE PENSION SCHEMES REGULATION ACT OF 1996

INTRODUCTION AND BACKGROUND

The Pensions and Insurance Authority (hereinafter referred to as “the Authority”) is established under Section 4 of the Pension Scheme Regulation Act No. 28 of 1996 (as amended by Act No. 27 of 2005, hereinafter referred to as “the Pension Scheme Regulation Act”). The Authority is mandated to administer the Pension Scheme Regulation Act and the Insurance Act No. 27 of 1997 (as amended by Act No. 26 of 2005), hereinafter referred to as “the Insurance Act”. Prior to the 2005 amendment of the Pension Scheme Regulation Act, the Authority existed and operated as the Office of the Registrar of Pensions and Insurance under the Ministry of Finance.

The Pensions industry consists of the Pension Schemes that employers set up to augment the mandatory pension scheme benefits, the registered service providers such as Pension Fund Administrators who are responsible for preparation of the benefit statements for the members and Investment Managers who are mainly responsible for the investment of pension funds. In the year 2020, there were 244 registered pension schemes with 113,117 individual pension scheme members (3.7% of the employed workforce), 9 pension fund managers and 6 pension fund administrators. Further, the total pension industry net asset as at 31 December, 2020 stood at K9.5 billion.

The current legislation dealing with the supervision of private pension schemes, is the Pension Scheme Regulation Act No. 28 of 1996 which was amended by Act No. 27 of 2005 to, among other things, establish the Pensions and Insurance Authority.

PROBLEM STATEMENT 

In trying to fulfill its mandate, the Authority has encountered several gaps in the legal framework. One of the first gaps identified is in dealing with public pension schemes. The public pension schemes in Zambia are fragmented in terms of their supervision. The Authority currently has no mandate over public pension schemes. For example, the National Pension Security Scheme (NPS) is supervised by the Ministry of Labour and Social Security, while the Local Authority Superannuation Fund (LASF) is supervised by the Ministry of Local Government and Housing, the Public Service Pensions Funds is supervised by the Cabinet Office. This has led to lack of coordination in the supervision of public pension schemes. The Authority has, over time, received pension scheme member complaints concerning their pension funds in public pension schemes i.e. non-payment or delayed payment of pension benefits. This has brought to question the capacity of the public pension scheme to discharge their obligations to their members. The failure of schemes to meet obligations has led to lack of confidence by the public in these pension schemes and the pension industry as a whole. A private pension scheme can be created in the form of a single employer or a multi-employer pension funds. The dynamics in dealing with multi-employer funds should be different from those dealing with single-employer funds. However, the current law does not take into consideration the different dynamics and instead requires the operation of a multi-employer funds in the same manner as single employer funds; which is impractical i.e. the composition of the board of trustees requires representation from employers which is impractical for multi-employer schemes.

The current legal framework supports private pension scheme designs that requires an employer to establish the scheme on behalf of its employees. This has the effect of excluding individuals, who do not have an employer, from having a pension. There is no mandate for the Authority to safeguard pension scheme members when a private pension scheme faces challenges that would lead to a pension scheme being unable to discharge its responsibilities towards scheme members and/or beneficiaries. This is also the case when service providers of a pension scheme undergo financial challenges that risk the stability of the funds of the scheme. The current legislation does not provide express provisions on the Authority’s powers to receive and investigate complaints. This leaves pension scheme members and policyholders without certainty of whether the Authority is required to investigate their complaint and what expectations they may have from such an investigation. An element of social security for citizens is the ownership of housing. A pension scheme member has no way of using a proportion of their pension funds as security against a mortgage loan in order for them to acquire or build their own housing before they reach the age of retirement. The service providers for pension schemes include Fund Managers, Fund Administrators and Custodians. The role of Custodians is to hold the funds and assets of the pension scheme even as the Fund Managers invest those funds. However, since the enactment of the Pension Scheme Regulation Act, there has been no registration of Custodians on the market. This means that there is a gap in the roles of the service providers that has been filled by the Fund Managers who are performing the role of custodians. This is not ideal as the 3 functions of service providers should be distinct and should act as checks and balances against each other. There have been instances where, because the funds of a pension scheme have been held by fund managers, at the time the fund manager has faced financial problems, the funds of the pension scheme have been under risk and recovery of those funds has been a difficult process that could have been prevented had the assets been held in a different entity.

There is no independent adjudicator with specialised technical knowledge in pension and insurance matters, to review decisions of the Authority. Furthermore, when industry stakeholders have had disputes, the avenue of resolution has been the courts where adverse judgments have been pronounced which threaten the stability of the pension industry. For example, in the case of Standard Chartered Bank (Z) Plc v Willard Solomon Nthanga and Others, the Supreme Court held that “deferred pensions were abolished”. The impact of such a judgment on the pension industry is that the current 7,889 deferred members would be required to withdraw their pensions from their schemes amounting to K76 million. These deferred members are at risk of old age destitution as their pensions would not be available to them at the time of retirement. This is inconsistent with pension practice across the world. Under the current licensing framework the validity period for a licence for a service provider is one year. This brings uncertainty in the operations of the service provider as they are normally contracted for services beyond the one year validity of their licence.