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GENERAL ASPECTS OF PENSIONS IN ZAMBIA AS A SOCIAL PROTECTION SYSTEM:
1. PREAMBLE
In order for the members of the committee to appreciate this submission it
would be imperative to give a brief overview of the role of the Office of
the Registrar of the Pensions and Insurance in the social security system
in Zambia.
The Office of the Registrar of Pensions and Insurance dubbed “The Pensions
and Insurance Authority” is an office established under the Ministry of
Finance and National Planning. The office was established in February 1997
after the enactment of the Pension Scheme Regulation Act No. 28 of 1996 to
serve as a supervisory and regulatory institution for the pensions and
Insurance industry. The insurance industry is supervised through a
different Act i.e. the Insurance Act No. 27 of 1997.
Therefore,
Pensions & Insurance Authority’s role in the social security sector borders
around the aspects of social insurance, which deals with measures to
protect income earners and their families against a reduction or loss of
income as a result of exposure to risks that impair one’s capacity to earn
the income. This is done through establishment of occupational pension
schemes, whether private or public. The Pensions and Insurance Authority
thus regulates and supervises the overall operations of these institutions
to ensure protection of the rights of the contributors. This is done
through ensuring that the aspects of the Pension Scheme Regulation Act No.
28 of 1996 dealing with compliance are adhered to.
In view of
the foregoing this paper will place more emphasis of social security in
terms of pension schemes.
2. GENERAL
SOCIAL SECURITY SYSTEMS DEFINITIONS
To
understand the social security system one needs to be conversant with the
terms that have been adopted world over and in particular in the Southern
African Development Community (SADC) region. These are social allowances,
social assistance, social insurance, social protection and social security
itself. However, it should be noted conceptually that social security
includes all the other four.
(i) Social Protection
This
refers to measures whether public, private or mixed designed to protect
individuals against life cycle crises that curtail their capability to
meet their needs. The main objective is to enhance human welfare. In view
of this we consider it to go beyond social security as it also covers
social services and developmental social welfare, which is dealt with under
the Ministry of Community Development and Social Services (MCDSS).
(ii) Social Allowances
These
are universal payments usually made to the most vulnerable that are exposed
to exceptional need e.g. children - older persons, persons with
disabilities etc. These are usually not means-tested and are a mere form
of social compensation. Naturally, this funded from government revenue.
(iii) Social Assistance
This
is a provision of minimum income support to persons who lack means to
support themselves and their dependants. Assistance is usually in form of
cash or in kind and given to persons not covered by any other form of
social security. However it is means – tested.
(iv) Social Insurance
This
type of social security is designed to protect income earners against
reduced or complete loss of income as a result of exposure to risks they
impair someone’s capacity to earn income. It is nevertheless contributory
by concerned parties i.e. employer / employee, self-employed etc depending
on type of scheme/plan and it is aimed at achieving reasonable level of
income maintenance.
(v) Social Security
This
refers to public, private or mixed measures designed to protect individuals
or families against income insecurity caused by contingencies such as
unemployment, employment injury, maternity, sickness, invalidity, old age
and death.
The main objectives of social security are therefore,
(a)
To
maintain income
(b)
To
provide health care
(c)
To
provide benefits to families
Clearly,
as indicated above, this is all encompassing and includes all sectors of
lives in the nation.
Note that
the contingencies in Zambia, depending on whether you are employed or not,
are dealt with as follows:
|
Nature of contingency
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Employed
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Unemployed
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Retirement/Unemployment
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Pension
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Social Protection/Assistance
Under MCDSS
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Employment - Injury
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Workmen’s Compensation
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None
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Maternity
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Monthly Pay
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None
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|
Schemes
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Pension/Hospice
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Hospice
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Invalidity
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Pension
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Social Protection/Assistance
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Old age
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Pension
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Social Protection/Assistance
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Death
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Pension
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None
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MCDSS =
Ministry
of Community Development and Social Services
3.
SUSTAINABILITY OF THE SOCIAL SECURITY SYSTEM IN ZAMBIA
i)
Policy, legal and regulatory framework of the Zambian Social Security
System
a)
Policy
(I) Background
The social
security system development in Zambia has had its own shortfalls since
independence. The government has been ensuring existence of a vibrant
social security system, however, this could not come to fruition. Systems
continue to be unbalanced and concentrated on individuals in formal
employment and the vulnerable (i.e. with donor support). Individuals in
informal employment have continued to be sidelined.
It should
be noted at this point that the Ministry of Labour and Social Security is
the major stakeholder in the development of the government policy on social
security. This can be appreciated through government’s efforts by
establishing the social security department within the Ministry in 1992.
In order to involve all stakeholders in the development of government
policy, the Minister of Labour and Social Security appointed a tripartite
National Social Security Reform Implementation Committee (NSSRIC) to
advise him/her on the mechanics of this reform.
(II)
Government Policy
It is noteworthy that Government Policy on social
security is to
“CREATE A COMPREHENSIVE SOCIAL PROTECTION SYSTEM THAT WILL
ADDRESS NEEDS OF BOTH THE FORMAL AND INFORMAL SECTOR”
This is aimed at dealing with both health and
financial welfare protection mechanisms for the entire population.
(b) The legal framework of the social security systems vis-à-vis
pension in Zambia.
The Zambia pension industry is a widely regulated industry in
so far as the numbers of pieces of legislation that directly affect it are
concerned. The following is the outline of the various Acts of parliament
and how they impact on the industry.
(i) Pension Scheme Regulation Act No. 28 of 1996 (PSRA)
This Act serves to provide for prudential regulation and supervision
of all pension schemes except for the National Pension Scheme mostly
referred to as NAPSA. This law therefore, has a bearing on both the public
and private pension scheme. It ensures that they operate in the most
prudent manner as to protect the pension scheme members’ accrued rights or
benefits at all times.
(ii) Local Authorities Superannuation Fund Act CAP 286 of 1996. (LASF
Act)
This
Act establishes the Local Authorities Superannuation Fund and defines the
way it will be managed and all aspects dealing with finance membership and
benefits thereof. The members in this scheme are basically those
from the Local Authorities, ZESCO, water utilities and National Housing
Authority.
(iii) Public Service Pension Fund Act No. 35 of 1996
As alluded
to in (ii) above, this Act also operates in a similar manner but, deals
with the members of the Public Service Commission, Defence Forces, Teaching
Service Commission, the Judiciary Service Commission, Police and Prisons
Service Commission and the Zambia Security and Intelligence Service.
(iv) National Pension Scheme Act No. 40 of 1996
This is a
compulsory state scheme for all Zambia citizens in formal employment within
Zambia. The Act exempts no one, though the Minister of Finance and
Economic Development then had exercised their powers to exempt companies
that bought the privatised divisions of the Zambia Consolidated Copper
Mines (ZCCM). It also envisages protecting all the contributing members’
accrued rights in the state defined benefit scheme through prudential
operational principles.
(v)
Land (Perpetual) Succession Act cap 186
This
establishes a Trust through incorporation of a pension scheme into a
legally established institution through trust deed executed by the Trustees
of the scheme. This only applies to private occupational pension schemes.
It neither applies to NAPSA nor the two public statutory schemes (i.e.)
LASF and PSPF)
(vi) Income Tax Act Cap 323
The Income Tax Act affects the entire pension arrangements enacted by Acts
of Parliament or supervised by the various pieces of legislations
highlighted from (i) – (v) above. It deals with taxation issues beginning
with treatment of the contributions made into the pension scheme by any
party concerned, the investment income and the pay outs (i.e. withdrawals,
pensions etc). It is noteworthy that it has prescribed rules in its fourth
schedule, of how a pension scheme should operate in order to benefit from
the tax exemptions it provides in its section 37.
(c)
Regulatory framework of the social security systems in Zambia vis-à-vis
pensions.
As can
been seen from the foregoing, the social security system vis-à-vis’
pensions or social insurance leaves much to be desired considering the many
laws that regulate the sector. This poses challenges and at the same time
brings about confusion at the intent of the legislators considering that
all these laws were enacted in the same year – 1996.
However, government in its quest to bring about a sustainable social
security system, had to ensure it strengthened existing laws on social
security as well as enacted new ones, where non-seemed to have existed
(i.e. for private occupational pension schemes).
It should be noted that, other than the existence of the law that regulated
the Zambia National Provident Fund, the then Civil Service (local
conditions) Pension fund, Local Authorities Superannuation Fund (the
oldest), no regulatory framework existed to prudentially regulate and
supervise the activities of the pension schemes in Zambia. The
Income Tax Act Cap 323 (ITA) served to approve pension schemes that were
established for purposes of giving them tax exemptions if they complied to
laid down rules and procedures in the ITA. The law does not necessarily
police the general operations of the schemes including the financial
soundness and rights of members in so far as the accrued benefits are
concerned. Consequently all private social insurance arrangements were not
covered adequately in this arrangement.
The foregoing is the more reason why the Pension Scheme Regulation Act No.
28 of 1996 was enacted to ensure the prudential regulation and supervision
of the occupational pension schemes. Note that this cuts across both
public and private occupational schemes. Of course this has been viewed as
over policing as far as the public schemes (LASF and PSPF) are concerned
because they have their own pieces of legislation and they have a
statutorily laid down reporting structure.
It should be noted also that the NAPSA Act No. 40 of 1996 also impacted
on the public schemes as it has now taken up all new members in the public
service and local authorities into its foyer leaving these schemes
vulnerable due to more payouts with aging membership and dwindling
contribution income due to less new membership.
However, it should be appreciated that the NAPSA Act was enacted to ensure
the general management of the assets of the state pension scheme so as to
avoid old age destitution for the working public.
Finally, it is noteworthy that the Pension Scheme Regulation Act No. 28 of
1996 superintends on the whole pension industry for supervision purposes
except for the National Pension Scheme. Some of its attributes are as
follows:
Requiring the Public and Private occupational pension schemes to
o
Register with the Registrar of Pension and Insurance in order to operate
o
Need to adhere to their Acts (PSPF and LASF) for day to day operations ()
o
Need to adhere to their Trust Deeds and Rules (i.e. for the private pension
schemes) for the day to day operations with respect to general
administration, contributions, formulae of benefits, qualification to
benefits etc
o
Need to be guided by the PSRA in terms of compliance matters in the quest
to operate prudentially (i.e. filing quarterly returns, audited statements,
actuarial valuations, sending benefit statements to scheme members etc),
adherence to prescribed regulations and pronouncements and any directions
by the Registrar of Pensions and Insurance.
o
Deregistration for non compliance
(ii) The
long-term vision for the development of social security system
The ultimate vision for the development of the social security system is to
ensure increase coverage for citizens irrespective of their circumstances.
In this regard the government needs to ensure that individuals from income
earners (both in formal and informal sectors) and those who do not have any
means of earning income are covered. This would in turn uplift the living
standards of the general population. This would be achieved as follows:
(a)
Development of strong three tier pension system
This is a
genesis of a guaranteed reduced state dependency by the citizens in old
age. A three-tier pension system is such that the first tier is the state
mandatory basic scheme mostly for people in formal employment
arrangements. In our situation, the National Pension Scheme (NAPSA)
represents this and usually such schemes world over are compulsory. For
this to be effective, it is suggested that strict procedures of identifying
eligibility and wider coverage be ensured and sustained.
The second tier is that of occupation pension schemes, which cover all
individuals, employed in both the private and public sectors.
The final third tier is that of individual/personal pension schemes. This
type of arrangement is uncommon in Zambia though usually people do it
indirectly by taking life insurance policies through insurance companies.
In all the three tiers aforementioned the government has a very vital role
to play i.e. that of encouraging culture of saving for old age by among
other things giving tax incentives to both the employer and the employed
and any other individuals saving for old age. It is envisaged that if
government offers those incentives, coverage would easily be increased and
this implies that there will be a lot long term finance in the economy
which can be channelled through the capital markets and other forms of
developmental projects through the institutional investors to stimulate
growth of the economy. On the other end, this will in turn imply increased
employment opportunities due to growth of the industry base. This cycle
continues and in the process the economy grows perpetually
A further
value added to the above is that through the third tier, it is expected
that the informal sector, which is far bigger than the formal sector, will
have access to social security through individual pension plans. It is
also envisaged that other than the current practice where pensions are tied
to occupations, we expect the third tier will enable employees to have
individual retirement plans in addition to those provided by the employer.
(b)
Introduction of mandatory health insurance
To lessen
government continued subsidies in the health sector, the government can
introduce this type of mandatory scheme where those who have incomes will
be required to pay in something into this scheme on a monthly basis and
will be used to service the health sector. It is envisioned that the
vulnerable will be assisted without having to rely on government finances
that are derived from the budgetary processes. However, this can be
achieved if government can extend the tax concessions. The government will
indirectly earn the tax revenue foregone by not being directly responsible
for subsidizing health fees for the vulnerable population.
(c)
Harmonisation of legislation
In order to achieve the foregoing, there is need to harmonise legislation
relating this type of social security so as to have one to deal with all
the supervisory matters and prudential regulation is concerned. Such are
the Pension Scheme Regulation Act No. 28 of 1996, Public Service Pension
Act No. 35 of 1996, National Pension Scheme Act No. 40 of 1996 and the
Local Authorities Superannuation Act Cap 284 and aspects that deal with the
general administration of the pension funds in the Income Tax Act Cap 323.
This will save as a measure to address the conflicting clauses in the said
legislation.
(d)
Strengthening the regulatory capacity of the Pensions and Insurance
Authority
Social security schemes (pensions) keep funds for and on behalf of citizens
who do not necessarily are involved in the day-to-day management of the
schemes. Consequently, the there is great need to set up water tight
supervisory structures so that the members accrued rights in the schemes
are properly safeguarded. Therefore, the institution that has been vested
with powers to supervise and regulate needs to be empowered both in terms
of human resource, financial capability and infrastructure to enable the
institution monitor the managers of these social security institutions to
avert any occurrence of fraud, mismanagement of funds and check any other
inadequacies.
(iii)
Issues that impact on the financing and investment portfolios of existing
social security schemes.
Issues impacting on the financing and investment portfolios of social
security schemes include the following:
a)
The
shrinkage of the formal sector through company closures, redundancies and
liquidity problems of the sponsors has had an adverse effect on the smooth
inflow of pension contribution income. This reduced income to the fund
affects the investment patterns in the economy as less and less funds are
channelled into investment activities rather, they go to finance benefit
payments and general administration costs of running the schemes.
b)
Government’s erratic financing of the public sector pension schemes (i.e.
Local Authorities Superannuation Fund (LASF) and The Public Service Pension
Scheme (PSPF)) has affected the liquidity positions of these schemes. This
also directly affects their investment patterns. Worse still, the
structure of government policy of reducing labour force in both the civil
service and the local government and allowing all the employees that have
been declared redundant to immediately claim their benefits from the public
pension schemes. This has left the schemes more vulnerable as there is a
huge backlog of pension benefit arrears leaving little or no more fresh
injection of funds into investments to earn extra income from the
investments. Such is the case with Mukuba Pension scheme as well.
c)
Absence of meaningful incentives through tax rebates has rendered the
running of social security schemes costly to both the employers and
employees. This is a discouragement to those who would want to develop a
culture of saving for the future. As a result, employers have decided to
close the schemes thereby impacting negatively on the financing of
investments in the economy.
d)
Viable private pension schemes in the industry have, however, been making
significant strides in ensuring that the investment market due to the
steady flow of contribution income
e)
Lack of investment viable investment vehicles has rendered the fast growth
of pension schemes a pipe dream. The capital markets are so restrictive.
A social security scheme such as NAPSA can buy off all the shares on the
LUSE listing.
(iv)
Issues affecting the sustainability of public sector social security as
compared to private sector social security schemes.
a)
Private occupational schemes enjoy low administration costs compared to
public schemes because of they have an option to pooling their resources
together as currently required under the Pension Scheme Regulation Act No.
28 of 1996. Pension Fund Managers manage pension funds on an agreed
management fee with the trustees. The public sector social security
schemes on the other hand suffer huge operational costs ranging from
general administration and remuneration for the huge workforce that they
manage. Such costs gobble over 40% of the total available assets in the
scheme on a yearly basis.
b)
Prompt payment of pension contributions in private pension scheme have
rendered them actuarially viable and financially sound from time to time.
This has enabled them to honour their obligations as they fall due. It is
never the same in the public sector scheme. The government is a perpetual
defaulter of debt and pension contribution payments. This is evident in the
K304 billion and the K78billion government owes PSPF and LASF respectively
as at 31 December 2004. The main reason could be that that the money to
pay pension contributions is taken from the treasury.
c)
Lack of effective legislation to penalize the sponsors in case of default
on their part with respect to sending contributions. The current Act does
not have stiff sanctions for defaulters. However private occupational
schemes’ sponsors tend to adhere to the law. It is worth noting that it is
almost impracticable for the Registrar to impose sanctions on the
government. This renders continued problems arising from the public sector
schemes.
(v) The
constraints against the sustainability of the social security system as a
whole.
a)
The
absence of tax incentives has stifled the growth of the industry. Many
people view the current tax regime as not being favourable for savings
through pensions. It is important that the tax authorities address this
situation before the industry collapses.
b)
Pension schemes have been designed only for people in the formal sector.
This has caused total marginalisation and exclusion of out the informal
sector and the other vulnerable population. If out of a population of 10
million people only 500,000 are in formal employment, it implies that
coverage is only 5% of the population at anyone time save for the other
social protection measures.
c)
The
economic growth of 4% is not sufficient to provide meaningful and positive
result on the labour market so as to improve accessibility to social
security.
d)
Current practice of casualisation of labour and employment of people on
contract basis has reduced the number of people having access to some
pension arrangement considering that the personal pension arrangements do
not exist in Zambia.
e)
Lack of a single and well coordinator legislation to police the operations
of the social security schemes.
f)
Administrative inertia and institutional inefficiency in the institutions
that have been vested with the role of managing the social security
systems.
(vi)
Proposed remedial measures to constraints identified, if any, that mitigate
against the realization of sustainability of social security schemes
a)
Introduction of a fully-fledged three-tier pension arrangement that will
increase coverage of individuals that have been systematically left out of
the social security system.
b)
There is need to introduce proper tax incentives for the pension industry
and health insurance scheme to enable large coverage of the population so
as to reduce dependency on government.
c)
There is need to harmonise and reform legislation dealing with pensions to
ensure the prudential regulation and supervision of the social security
schemes and also tightening controls in all areas. This should cover the
National Pension Scheme which is currently not supervised by any regulatory
body despite being the custodian of the basic pension for all employees in
the formal sector
d)
Improvement of governance issues relating to the institutions in the social
security system to make them more responsive to the needs of the
contributors and other stakeholders.
e)
Empowering the Pensions and Insurance Authority by making it a body
corporate, enhancing its capacity in terms of human capital, financial
resources and infrastructure to enable it carry out its supervisory roles
effectively.
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