One of the most notable changes happening within the pension’s industry not just in Zimbabwe but across the world, is the shift from Defined Benefit (DB) schemes to Defined Contributions (DC) schemes. Along with this shift, comes the transfer of investment risk from employers to employees.
From observing general practice in DC schemes in Zimbabwe however, the transfer of investment risk from the employer to the employee has not necessarily been accompanied by a change in investment approach and risk management.
When Trustees make investment choices in a DB scheme, a single investment strategy is generally adopted – usually informed by, amongst other factors, the average age of the members in the scheme and the sponsor’s tolerance to risk since the risk of under-performance lies with the employer. This approach generally works in a DB scheme because, whilst the assumptions used to determine the investment mix will not hold true for any individual member, over the group as a whole they may, on average, provide a good estimate.
In a DC scheme, however, contributions and investment returns accumulate in each individual’s specific account. A single strategy informed by group averages will therefore not necessarily work for all members in the scheme. For example, a fund strategy which is adopted based on an average scheme age might be optimal for the “average” member in the scheme, but, might in reality end up with a 64- year- old with only a year to retirement following the same investment strategy as a 25- year- old who still has 40 years to retirement.
Currently, in Zimbabwe, declining fund credits especially for those members nearing retirement due to too much exposure to equities, are a testament to how such an approach could go wrong. The investment strategy adopted by members in a DC scheme should be reflective of the members’ retirement goals, their time until retirement and the individuals’ attitude to risk. DC scheme members in Zimbabwe should be given options to switch their investment strategies as their circumstances change. Since it is the member that is taking up the investment risk, it stands to reason that the member should be afforded greater decision making and also have more control; or at least be presented with more options as to how their money (retirement savings) are being invested. After all, it is their money and they are the ones who will ultimately benefit from the risks and the rewards.
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