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Pension arrears jump to K26 billion

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Gerald Chima

The country’s pension arrears jumped to K26.2 billion in December 2020, as the number of firms failing to remit pension deductions increased, the Reserve Bank of Malawi (RBM) has said.

By June the same year, pension arrears were pegged at K24.4 billion, which means the amount due to pension management firms increased by K1.8 billion in the second half of 2020.

In its December 2020 Financial Stability Report released last week, RBM says although pension membership has been on the rise over the years, the increase in contribution arrears continued to slow down progress in the overall pension contributions trends.

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As of December 2020, cumulative assets of pension funds increased to K1.049 trillion from K945.5 billion in June 2020, representing 11 percent growth— which was relatively higher than 7.7 percent growth in the first half of the year.

RBM says counterparty risk, arising from some employers failing to remit pension contributions in line with statutory requirements remain high as arrears are projected to continue rising due to the Covid pandemic and sustained preventive measures which have disrupted economic activities in the country.

“Further, possible failure by private entities to settle debts, particularly unlisted private debt, presents additional counterparty risk. During the period, pension funds were minimally affected by defaults reported by one portfolio manager,” RBM says.

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The central bank says the pensions industry also faces a Covid risk as employers have had to lay off staff or reduce productivity levels due to lack of, or reduced, business opportunities and economic activity.

This, RBM says, was reflected in a sharp rise in early pension withdrawals paid for members who had been out of employment for over six months.

Another risk facing the industry, according to RBM, is the market risk from short-term volatility in prices of listed shares, given that 49.2 percent of pension fund assets are invested in listed equities.

In the second half of 2020, pension funds benefitted from positive trends in asset prices, especially at the stock market.

RBM warns that going forward, there is a high likelihood that stock prices may plummet again due to seasonal factors, with more threats coming from the effects of a second and more aggressive wave of Covid infections which may worsen companies’ performance, among others due to restriction measures put in place.

Speaking in Mzuzu in November last year during a client engagement seminar which Nico Pensions Limited organised, RBM Principal Examiner for Pension Regulation Peter Kambalame said many companies were not remitting their employees’ pension funds deductions to pension fund managers, which was negatively affecting the accumulation of a retirement savings for pension members.

Late last year, Nico Pensions Limited General Manager Gerald Chima said there was a reduction in pension remittance compliance rate, with many companies not remitting pension funds deductions while others were remitting after the stipulated time.

The Pension Act 2010 makes pension funds remittance mandatory and, under it, employers are mandated to enrol their employees on a pension scheme.

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