INSURANCE firms and pensions funds are now required to create a third sub-account for foreign currency denominated contributions.
This comes as the sector regulator — the Insurance and Pensions Commission (IPEC) recently issued updated guidelines on adjusting insurance and pension values in response to the 2019 currency reforms.
The new foreign currency denominated sub-account has also been necessitated by last November’s promulgation of Statutory Instrument 280 of 2020, which allowed these entities to carry out business in hard currency.
“The update Guideline (May 2021), in addition to the two sub-accounts prescribed in the March 2020 Guideline, now require creation of a third sub-account if a pension fund has received foreign currency contributions,” said IPEC actuarial director Mr Robson Mtangadura.
Related to this, the updated guideline for insurance firms also made it explicitly clear that such funds are not required to set up sub-accounts provided they acquired the Paid-Up Status prior to December 2018.
In addition, such funds may also be exempted from peer review requirements due to cost considerations.
The introduction of a third (foreign currency) sub-account is one of several additions that have been made to the regulations that were announced in March last year.
The guidelines were applied with effect on insurers and pension funds’ financial reports for the year ended December 31, 2019.
Mr Mtangadura said the new changes had been made after considerations of submissions made by players in the industry.
“Informed by implementation lessons drawn from the assessment of the 2019 submissions from the industry, the Commission updated the Guideline (May 2021) to consider the following: to address the implementation challenges that were observed in the 2019 submissions, and to incorporate necessary feedback from the key stakeholders within the insurance and pensions industry,” he said.
In terms of other key changes to the regulations, audited financial statements for pension funds and insurance companies should clearly and separately show the split of assets in sub-account 1 & 2.
This was an implied provision in the original guideline.
There is also a new provision to allow actuaries to update assumptions that they use to derive the liabilities of an insurance company or pension fund.
“In the guideline issued in March 2020, actuaries were not required to change the assumptions that they use to derive the value of liabilities of an entity but rather maintain the US dollar assumptions that were used as of December 31, 2018.
“However, noting that the exchange rate has already moved from USD1:1 to around USD1:84, it became necessary to allow actuaries to revise the assumptions in the updated guideline (May 2021),” said Mr Mtangadura.
“Actuaries are now required to exercise their professional judgment and justify revision of the assumptions they are using to derive the value of liabilities from the December 31, 2020 onwards,” he said.
The new requirements also include notional and physical separation of sub account 1 & 2, as well as specifying the penalty on outstanding contributions, that is, IPEC will retain the unsecured overdraft lending rate applied by the affected pension fund’s bank as the applicable penalty rate effective January 1, 2020.
The guidelines are aimed at ensuring that insurance policyholders and pension fund members are treated in a fair and equitable manner, taking into consideration asset repricing due to currency reforms.
In 2019, Zimbabwe went through significant currency reforms that saw valuations of assets and liabilities held by pension and insurance companies assume Zimbabwe dollar values away from US dollars.