Withdrawals cause alarm for Dar pension schemes

 Photo : LAPF Millenium Tower.

By ADAM IHUCHA Special Correspondent

Posted  Saturday, March 2  2013 at  17:59

In Summary

• While the existing legal framework and the schemes’ design do not provide for untimely withdrawal from the pension system, the practice is becoming more prevalent in all schemes as more Tanzanians opt out of retirement savings once they lose their jobs.
• Such a pace of withdrawals could create social insecurity and place a higher burden on the working generation, analysts said.
• Fund managers who handle retirement money said withdrawals would affect the performance of their investment portfolios.

Tanzania’s pension funds are facing a bleak future as premature withdrawal of members’ contributions rises.

While the existing legal framework and the schemes’ design do not provide for untimely withdrawal from the pension system, the practice is becoming more prevalent in all schemes as more Tanzanians opt out of retirement savings once they lose their jobs.

A study by the National Social Security Fund, the public pension manager, shows that from 2007 to 2011 withdrawals across all pension funds soared from Tsh46.6 billion ($29.125 million) to Tsh119.66 billion ($74.788 million), equivalent to 29.7 per cent of total benefits paid, hurting the schemes’ long-term plans.

Such a pace of withdrawals could create social insecurity and place a higher burden on the working generation, analysts said.

Sadi Shemliwa, the chief actuarial and risk manager at NSSF, said the number of members withdrawing their contributions surged from 45,239 in 2007 to 85,760 in 2011.

“Although withdrawals have no long-term impact on schemes’ pension liability, it is worth noting that the schemes lose liquid funds needed for investment that is meant to increase the value of their reserve funds,” said Mr Shemliwa.

Players said some of the members withdrawing from pension funds were using the cash to meet basic financial obligations, like paying school fees for their children, in the wake of high inflation.

Inflation in Tanzania stood at 10.9 per cent in January, said the National Bureau of Statistics. The headline rate was unchanged at 12.1 per cent in December, ending an 11-month run of falling inflation.

“Most of the victims of retrenchments and job losses lack alternative benefits. Difficulty in accessing credit from banks and financial institutions make social security savings an easy target for capital needs, contrary to its objective of life insurance contingencies,” said Zitto Kabwe, the shadow finance minister.

“The public views social security funds as savings institutions that are supposed to refund their contributions with interest at any time when they lose employment, regardless of their age,” he added.

Fund managers who handle retirement money said withdrawals would affect the performance of their investment portfolios.

“By allowing members to withdraw a total of Tsh119.66 billion ($74.788 million) in 2011, schemes were denied the opportunity to increase pensions in payment by five per cent to the detriment of pensioners,” Mr
Shemliwa said. This amount of money is equivalent to five per cent of pension paid in 2011.

Tanzania is grappling with a problem Kenya found itself in two years ago, after it allowed workers early access to their own retirement contributions plus half of their employers’ and any accrued profits.

Kenyan fund managers cautioned that the new provisions threatened to depress the growth of the aggregate pension savings and further hurt the capital markets since retirement benefits offer the largest pool of investment funds.

Data shows Kenyan workers withdrew a total of Ksh1.3 billion ($15 million) from their retirement savings in 2011 following new regulations.

Figures indicate that NSSF and the Parastatal Pension Fund (PPF) schemes constitute 99.24 per cent of benefit paid out as refund of contributions in the period under review.

The total number of withdrawal cases for both NSSF and PPF constitute 99.25 per cent of withdrawal cases for all schemes.

“The reason withdrawals are more common to NSSF and PPF is that both schemes have majority membership drawn from the private sector, where the labour market is volatile compared with the public sector,” said Mr Shemliwa.

Experts said the trend was attributable to pension funds’ continued leniency on withdrawals.

“Pension schemes should blame themselves for the mess because they introduced and promoted withdrawal as one of their benefits,” said Abdallah Saqware, a lecturer at the Institute of Finance Management.

“They should omit withdrawal from being among the benefits and introduce unemployment benefits, where people could be enjoying payment after losing employment until they secure new jobs,” said Dr Saqware.

NSSF Director General, Dr Ramadhan Dau said the Bank of Tanzania and capital Market Authority (CMA) should review investment guidelines of pensions funds to allow them to participate in productive sectors in a bid to create more jobs and attract members.

CMA, for example, he said, can encourage listing of municipal bonds, corporate bonds for companies such as the National Housing Corporation and diaspora bonds.

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“What we see in the guidelines are different limits in different categories, which do not address requisite priorities as contained in other national policy documents,” Dr Dau said.

“In spite of their large capacity to mobilise domestic capital, pension funds are not considered as possible agents of growth, because investment guidelines do not reflect the thinking of the state in its vision 2025” Dr Dau said.

According to Social Security Regulatory Authority (SSRA) director general, Irine Issaka, assets of the social security schemes have increased from Tsh4.4 trillion ($2.750 billion) in 2011 to Tsh5.6 Trillion ($3.500 billion) in 2012.