Strategic Performance 2001-2005

In November 2000, the Board of the Fund adopted a Five Year Strategic Plan for the period spanning January 1 2001 to December 31 2005. The following goals and timetable underpinned the 2001-5 FYSP.

The goals above were developed after a thorough review of the Fund’s operating environment, both internal and external.

In general, it was felt that the Fund’s biggest priority had to be recovering contribution arrears from member organisations as it was this that was restricting its ability to fulfil its core duty of serving its members’ interests. The liquidity that would ensue from the payment of member obligations on time was also key to the Fund achieving many of the other  above-mentioned goals such as improving its internal operations and commencing viable parallel ventures.

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Commentary on Fund Progress in Achieving Strategic Goals

The Fund’s progress in achieving the strategic goals of the 2001-5 FYSP are summarised in Table 1 below:

Table 1: Fund’s Progress in Achieving Strategic Goals

Conclusion

The Fund has made progress in the implementation of the 2001-5 FYSP. However, progress has been slow in a number of key areas such as the collection of contributions, the payment of benefits and in the reform of the Act. It has been suggested in some quarters that the initial basis for setting goals and objectives was flawed and did not properly take into account the difficulties of the environment in which the Fund operated – particularly with respect to correcting the Fund’s financial position which has lain at the heart of most of the difficulties the Fund has faced in implementing the 2001-5 FYSP. It has further been suggested that many of the goals and objectives overlapped and lacked clarity.

Given the foregoing, resolved Management resolved that the 2006-10 FYSP should      re-examine the Fund’s operating environment (both internally and externally) more thoroughly and come up with briefer, more clearly defined and measurable objectives to give a realistic basis for implementing the same. This change of focus underpinned the development of the 2006-10 FYSP, which is contained in the remainder of this document

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Development of Strategic Plan for 2006-10

Approach Taken to Developing Strategic Plan for 2006-10

During a strategic planning workshop the Management defined strategy of an organisation broadly as the set of measures and principles to take the organisation from where it is today to where it wants to reach in future. The starting point in the development of the strategic plan was therefore to do an analysis of the position of the Fund as it stands today, a S.W.O.T analysis, and from that determine where the Fund could and should get to in future – essentially define the Fund’s Vision and/or Mission Statement. From that a set of broad strategic objectives followed by operational objectives was developed which would have timeframe and budgets linked to them. Diagram 1 below illustrates the approach that was taken in developing the Five-Year Strategic Plan for the years 2006-10.

S.W.O.T Analysis of Fund

During the aforementioned strategic planning workshop, the following were identified as the Strengths, Weaknesses, Opportunities and Threats (SWOT) of the Fund as it currently stands:

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STRENGTHS

1.   Attractive benefits packages: the Fund has among the most attractive pension and benefit products in the country. A full description of pension and benefits products offered by the Fund is given in Appendix 2.

2.   Competitive staff benefits: the remuneration packages offered to members of staff are attractive. The relatively high retention rates of members of staff coupled with the Fund’s success in drawing members from other leading organisations in Zambia is good evidence of the attractiveness of the Fund’s remuneration packages.

3.   Effective IT system: many areas of the Fund’s operations have become digitised. This has speeded up and improved the efficiency of operations at the Fund. Much still needs to be done to bring all operations and records into the Fund’s IT system. But, the foundations that have been laid by the IT developments at the Fund during the period of the 2001-5 FYSP have laid a good basis for effecting the necessary improvements in future.

4.   Developed financial services packages: members of the Fund are able to qualify for, among others, housing loans after a specified period of membership. This makes the Fund unique among pension schemes in the country.

5.   Good industrial relations: the Fund has a good history of reaching agreements through collective bargaining – with its union, the Zambia United Financial Institutions and Allied Workers Union (ZUFIAWU). There has never been a strike by workers of the Fund over conditions of service for a considerable period of time.

6.   GRZ guaranteed pension scheme: because an Act of Parliament created it, the Fund is a Government guaranteed scheme. This means that any financial shortfalls by the Fund are required by Law to be met by GRZ. This offers an element of security to members in that they do not risk losing their financial claims on the Fund in the event of the Fund becoming insolvent.

7.   Good stakeholder support: Management has historically and continues to enjoy a good level of support from the Board  and the Ministry. Regarding the latter, during the period of the 2001-5 FYSP, successful interventions on the Fund’s behalf have resulted in a grant in contribution of K 8.25 billion being forwarded to the Fund by GRZ in 2005 to settle the obligations of the Councils. In 2003, the Fund concluded a K 7 billion debt/equity swap that resulted in the Fund obtaining assets in contribution from GRZ in the form of GRZ equity in newly privatised companies in exchange for writing off the K 7 billion amount from the debt owed by Councils.

8.   Prescribed membership: because the membership of Fund is defined by law, the Fund is relieved of the burden of actively going out into the market to obtain new members and/or pension scheme management mandates as is the case with for instance private pension schemes in the country. The membership base is undoubtedly shrinking on account of the NAPSA Act. But, the Fund still has a membership base of some 15,000 members. A breakdown of membership per Associated Authority class is given in Appendix 1.

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WEAKNESSES

1.   The Act is weak: a number of areas of the Act are weak. Principal among these is Section 28 of the Act. This Section addresses what is to happen if a worker is retrenched from an Associated Authority. The wording suggests that the Fund pays the worker first and recovers the amount that is paid from the Associated Authority from which the worker has been retrenched. Most of the Associated Authorities lack the financial resources to pay the Fund its dues. It has resulted in considerable financial pressures on the Fund. Other areas of weakness in the Act include:

-     Limited enforcement clauses: this is a problem at a number of levels. Principal among these is the enforcement of collections by Associated Authorities and refunds for the aforementioned Section 28 payments. The only penalty levied on defaulting Associated Authorities is a 4% p.a. penalty charge. This means that all unpaid contributions are essentially an asset that is offering negative real returns as the rate of inflation has averaged 20% p.a. in the recent past.

-     Relatively outdated procedures for effecting an investment: the investment market is such now that decisions have to be made in a relatively quick space of time because of the dynamics of the market and because of the limited time with which new investments are available on the market.

2.   High contribution rate: the required contribution rate by the Fund’s Associated Authorities is 10% employer contribution and 23% employee contribution. This was put in place in an amendment to the LASF Act in 1989 to cover the Fund against financial demands that were likely to fall on the Fund following the lowering of the pension able age from 60 to 55. The rate is very high by industry standards and costly for Associated Authorities.

3.   Lack of in-house actuarial tools to assess the financial viability of the Fund: the Fund has no focused actuarial skills among its staff component. This is a problem throughout the social security system in Zambia. This results in the Fund having to engage the services of external parties to do its actuarial work, often at great cost.

4.   Capacity shortage among investment managers: the Zambian investment market is becoming increasingly sophisticated. Among new instruments that have arrived on the market over the last decade are corporate bonds, public equities and unit trusts. Because these instruments have not been there in the past, there has been little necessity to build up an experience base to manage the same. Lack of investment management skills is a problem throughout the pensions industry and the Fund is not unique in this respect. Nevertheless, it is something the Fund should look to address through increased training of investment officers as the investment market offers an effective route for the Fund to derive effective income, grow its asset base and improve its actuarial position.

5.   Lack of integrated IT system: again, despite the fact that strides have been made in the area of IT, all levels of operations need greater integration. The Fund would for instance ideally like to have a system whereby all Associated Authorities are linked into the Fund’s IT system so that matters like updating and verifying member records become more integrated.

6.   Bad public image: principally because of the late payment of member obligations, the Fund has over the years developed a very bad reputation with members of the public and other key stakeholders. Although most of the problems have resulted from matters beyond the control of Management, they have nevertheless contributed to creating a very bad image for the Fund.

7.   Poor customer care: progress has been made. However Management still considers it to be an area of weakness. This has in some ways contributed to the bad public image mentioned above. As alluded to earlier, an orientation towards serving the interests of customers/stakeholders is something Management is very keen on achieving during the period of the 2006-10 FYSP.

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OPPORTUNITIES

1.   Diversifying the Fund’s investment base: although the Fund has made progress in this area viz. a viz. making property a larger part of its overall investment asset portfolio, opportunities exist for further diversifying its investment asset base. At the present time, equities listed on the Lose are a disproportionately large portion of the Fund’s investment asset base. In the short-term, the Fund has the opportunity to sell down part of its equity portfolio and move the proceeds into other instruments like GRZ securities. Long-term, the Fund hopes to look at growth oriented investments such as those in Zambia’s fast growing tourism sector as well as targeted investments in property as the property market appears to be attractive once more after many years of decline.

2.         Introduction of new products for members: at the present time, the only non-benefit product offered to members is house loans. It is not un-common for pension schemes to extend benefits to members such as medical and life assurance products. In the proximate situation in Zambia, the personal loan market appears to be quite attractive.

Commercial banks and micro-finance institutions are currently filling the gap in this market; interest rates offered by the aforementioned organisations are exorbitant. Management sees opportunities for offering loans to its members at much lower interest rates. Since joining the Fund is optional for members of Associated Authorities who joined following the creation of NAPSA, Management also sees opportunity in using the availability of these benefits as a platform for attracting employees of the said organisations to membership of the Fund.

3.   Changing the Act to allow the Fund to bring in members from other organisations: the Act limits the membership of the Fund to employees of Associated Authorities who joined before the creation of NAPSA. Although this can be good in that the membership base is clearly defined, it can conversely also serve as a constraint in that the Fund is restricted from drawing in additional members. Given the shrinking membership base because of the creation of NAPSA, it has become extremely important for the Fund to look for different ways of bringing in new members if the Fund operations are to be sustainable over the longer term. Because Law defines membership, a legal change will be necessary to allow the Fund to attract additional members.

4.   Better cost management: the Fund’s AE:I ratio has been above the level prescribed in the Act and the PIA limit for virtually the whole period of the 2001-5 FYSP. Much of this has been the result of weak contribution streams from member organisations. However, Management feels that it can also be better reached by controlling costs within the organisation. Better screening of expenditures on among others consumables and hardware, as well as better accountability procedures for actual expenditure would go a long way towards reducing improving this area of operations.

5.   Partnership with other organisations: this is quite an open-ended area. The Fund can however for instance work with insurance companies to offer attractive insurance packages for persons who are members of the Fund. This specific example would benefit both parties because it would give the insurance company/s access to the patronage of the Fund’s member base, whilst the Fund would be able to use it to attract new members. Another example is designing benefits whereby a members can gain discounts on services offered by other Associated Authorities. As an example, a person employed by ZESCO in Lusaka would be able to get discounts on his/her water bill from the Lusaka Water and Sewerage Company – which is also a member of the Fund – as well as on rates payable to the Lusaka City Council. Another important opportunity is entering into joint ventures with other pension schemes to progress investment opportunities; this has come to be seen as a prudent course of action to take because it will both make more investment funds available and lower the risk to each individual scheme in that it will not carry 100% risk on an investment on its own.

6.   Change in the benefits structure: members are currently able to commute up to 2/3 of their entitlement on separation on account of retirement. This is a large portion and is not in line with pension industry trends worldwide. There is thus the opportunity to lower this commutation limit to better reflect international trends. Should this happen, it may contribute to improving the financial position of the Fund because immediate claims upon retirement would be lessened. However, as this is a major benefit enjoyed by members, it may prove difficult to implement. It will also require the Law to be changed which, as been observed during the period of the 2001-5 FYSP, is an extremely difficult objective to achieve.

7.   Raising of the pensionable age to 60: there is currently a debate going on that the pension age be brought back to 60 instead of the present 55. Should this be done, the financial burden on the Fund would be reduced in the short-term because liabilities would be deferred by a further five years. A task force has been formed to look at the  possibility of raising the pensionable age to 60. Government is expected to make a decision on the same in the not too distant future.

8.   Adjusting the required monthly contribution to ease the financial burden on Associated Authorities: matters at the Fund are such that lowering the required monthly contribution carries with it considerable financial risks particularly in light of the Fund’s shrinking membership base. Nevertheless, a well-thought approach to the problem would, in addition to lowering the financial burden, create good faith among Associated Authorities and hopefully ensure that monthly contributions come in on time.

9.   Other strategies to restructure debt: this refers to using innovative approaches to manage the debt of the Associated Authorities. The Fund can for instance use measures that have been implemented in the past such as debt:equity swaps involving shares owned by Government. Other measures include selling the debt of ZESCO on the open market and participating in new initiatives like municipal bonds to address the debt problems of Councils. 

10. Use political good will to progress initiatives: the Fund’s has acquired good will from various stakeholders because of attempts that it has made to address the problems that it is facing during the period of the 2001-5 FYSP. There is the possibility of leveraging this goodwill to try to further progress initiatives such as recovering contribution arrears and having the Act amended.

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THREATS

1.   The NAPSA issue: since NAPSA came into existence, the Fund has lost membership to NAPSA, which has effective contribution income. Should the situation continue to prevail without appropriate remedial action, this could result in further financial difficulties for the Fund.

2.   The HIV/AIDS pandemic: HIV/AIDS has ravaged virtually all private and public organisations in the country. The threat posed by the HIV/AIDS pandemic to the Fund is two-pronged. The first is the prospect of paying out early claims on account of death, whilst the second is further erosion of the membership base – which is already suffering from losses of membership to NAPSA.

3.   New Enforced Penalties by PIA: in the amended Pension Scheme Regulation Act which was recently passed by Parliament, the PIA has broader powers to de-register member organisations that do not comply with its regulations. The Fund is well short of where it should be with respect to complying with all PIA requirements. As such, there is the very real threat it could incur penalties that could lead to de-registration.

4.   Insolvency: because of low contribution streams in relation to claims arriving on the Fund, insolvency is a very real threat. The last actuarial valuation put the Fund in a deficit position. Whilst not a big a threat in the short-term, it could affect the Fund long-term as its membership base continues to shrink and as claims on the Fund increase. The Fund is shielded somewhat from the possibility of insolvency by virtue of being a GRZ guaranteed scheme.

5.   Pull out by Associated Authorities due to high contribution rates: some Associated Authorities are said to be contemplating withdrawal from the Fund to set up their own pension schemes on account of the Fund’s high contribution rates. Should this happen, the Fund will find itself in further Financial difficulties and with an uncertain future. But, in the short-term, this is unlikely to happen because it will require changes in the Law, which often take a long time to achieve.

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ADJUSTING OF THE ANNUITIES

BACKGROUND

The Local Authorities Superannuation Fund has over 6,500 pensioners who are in receipt of annuities. Members who qualify for an annuity are those who retired from employment and had either commuted 1/3 or 2/3 of the Gross Annuity for a lumpsum benefit. The balance is paid as an annuity until the death of the retiree.
Over the years, the annuities received by LASF pensioners have not been adjusted. This has resulted into the majority especially those who retired prior to 1990 having their annuity pension product lose value due to time value of money.

In this regard, LASF management put in a proposal to adjust the annuities upwards for the first time in the Fund’s history.

RESEARCH ON EXISTING/ADJUSTMENT POLICIES IN THE PENSIONS INDUSTRY

To understand the indexation!adjustment position on annual pensions, the Management of LASF carried out a research at other similar pension schemes. These included statutory pension schemes — the National Pension Scheme Authority and Public Service Pension Fund and private pension schemes — Madison Insurance and Professional Insurance.

APPROVAL OF THE ADJUSTMENT

Management prepared the report to the LASF Board and the Ministry of Local Government and Housing. The recommendations by Management were approved by the Board and the Minister of Local Government and Housing during the year 2003.

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EFFECTIVE DATE

With effect from 01st January, 2004, all annuities have been adjusted upwards. The new policy is that annuities will be adjusted upwards every three years depending on the financial performance and advice from actuaries.

The adjustment made was increasing annuities to K1 00, 000.00 for all pensioners who were receiving less than K50, 000.00 and increasing annuities for pensioners receiving more than K50, 000.00 by K100, 000.00 across the board. The increase for those who were receiving less than K50, 000.00 represents an increase exceeding 100%.

Management is committed to provide a reasonable pension product especially with improved liquidity.

THE DEBT EQUITY SWAP TRANSACTION

In its Five Year Strategic Plan, the Fund set restructuring of the Council debt through various options such as debt swaps, factoring and other available options as a strategic priority. In this regard, during the year 2002, LASF made a proposal to recover part of the contribution debt owed by the Councils through a debt equity swap arrangement.

APPROVAL AND CLEARANCE OF THE PROPOSAL BY THE LASF BOARD AND THE MINISTRY OF LOCAL GOVERNMENT AND HOUSING

At the Board meeting held on 23’’ July, 2002, the LASF Board of Directors approved management’s proposal to recover the contribution arrears of the Local Authorities through a debt equity swap arrangement. The Board had approved a maximum of K10 billion be available for the purpose of facilitating the debt swap.

On 16th October, 2002, the Ministry of Local Government and Housing wrote to the Ministry of Finance and National Planning giving principle approval that it is in support of the Fund’s proposal.

CONSULTATION WITH STAKEHOLDERS

The Fund made consultations with various stakeholders and regulatory bodies in the securities market in order to establish the procedures involved and legal position regarding the debt swap. The stakeholders and regulatory bodies consulted were the Bank of Zambia, Lusaka Stock Exchange, Securities and Exchange Commission, Zambia Privatization Trust Fund and Investrust Merchant Bank in their capacity as lead managers for the BP floatation.

RESEARCH ON THE PERFORMANCE OF COMPANIES THE FUND IS IN WHICH LASF ACQUIRED SHARES

Management conducted a research on the performance of the companies in which the Fund was seeking to acquire shares. The report was submitted to the Board, Ministry of Local Government and Housing, Ministry of Finance and National Planning, the Bank of Zambia and other relevant stakeholders.

These companies are:

• BP Zambia Plc;
• National Breweries (Z) Plc;
• Pamodzi Hotels;
• Zambia Sugar Plc; and
• British American Tobacco Zambia.

JUSTIFICATION FOR INVESTMENT IN ZPTF HELD EQUITIES THROUGH A DEBT SWAP ARRANGEMENT

In making a proposal to acquire Government shares held by the Zambia Privatization Trust Fund (ZPTF) in exchange for the council debt on unremitted contributions, LASF management justified that a debt swap arrangement would be beneficial for the Government, the Fund and the Associated Authorities.

A debt swap would be beneficial for Government because it would entail that Government, the Fund’s de facto guarantor, would not have to spend its limited cash resources to settle the contribution obligations of the Local Authorities and the limited cash resources could be directed towards other sectors of the economy.

The debt swap would also further prOvide an opportunity to relieve the burden of settling the contribution debt on the Local Authorities themselves. Most Local Authorities are currently not in a position to pay their debts as many are experiencing severe financial problems as a result of a reduction in their revenue bases. This position has been confirmed by recent tours of Local Authorities by officers of the Fund.

Finally, Management was also of the view that, the debt swap would go some way towards alleviating the Fund’s own liquidity difficulties. This is because the shares acquired would provide the Fund with an alternative revenue stream through the payment of dividends in the long run and, on appropriate occasions, the disposal of equities on the Lusaka Stock Exchange (LuSE).

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BENEFITS OF THE DEBT EQUITY SWAP

The following benefits were identified and expected to accrue to various stakeholders as a result of the debt swap:

1. Diversification of the Fund’s investment portfolio: in the Five Year S trategic P lan, the Fund c onimitted itself t o diversifying its investment portfolio so as to increase the bases from which it draws income and to improve its overall liquidity. In 2002, the Fund made significant headway towards achieving this objective via the formulation of a new Investment Policy document. The Investment Policy document was approved by the Investment Committee and the full Board on 16th and 24th May, 2002 respectively. The Fund saw the acquisition of shares through a debt swap as being a major step in diversifying its investment portfolio, a key cornerstone of the Investment Policy document.
2. Improving confidence in the Zambian capital market: despite recent signs of greater activity, the Zambian capital market still has significant room for growth. The Fund, by taking up the GRZ shares held with the ZPTF, felt that it would be playing a role in increasing financial market confidence as it is one of the largest pension schemes in the country.
   
3. Improvement of the Fund’s investment asset quality: at the time of making the proposal, a large portion of the Fund’s investment was in real estate. The property market in Zambia has been experiencing a long—term structural decline and this has somewhat reduced the value of holding property as an investment asset.
   
4. Enhancing Zambian ownership of strategic assets: the Fund was of the view that it would be enhancing and supporting Government’s policy of empowerment of indigenous Zambians through share ownership, as well as increasing the level of Zambian ownership of major corporate enterprises in the country;
   
5. Saving of liquid resources by Government: as previously mentioned, the debt swap would relieve Government, the Fund’s defacto guarantor, of the burden of having to find liquid resources to settle the debt of the Local Authorities;
   
6. Learning curve for similar transactions in future: the Fund could use the knowledge gained through the debt equity swap to participate in similar debt swap transactions in future years.
   
7. Restructuring the Fund’s balance sheet: The Fund’s balance sheet will be restructured to a favourable position of increasing its investment assets and reducing the debtors on contribution. The latter has been a doubtful debt for a long time and External Auditors have been asking how realizable the debt was.

APPROVAL OF THE DEBT EQUITY SWAP BY THE MINISTER OF FINANCE AND NATIONAL PLANNING

On 2O August, 2003, the Minister of Finance and National Planning approved the debt equity transaction and further authorized ZPTF to transfer K7 billion worth of shares from ZPTF account to LASF.

In line with the authorization by the Minister of Finance and National Planning that shares be transferred at market value, LASF and ZPTF
agreed to transfer the shares at prices prevailing on the LuSE on the dates of the transactions.

The share prices on the date of transaction (September, 2003) and the number of shares acquired are as follows:

The acquisition of the Zambia Sugar shares involved three (3) different trades at three different prices. The first trade involved 50,000,000 shares and was transacted at a share price of K 33.90; the second trade involved 10,105,773 shares and was transacted at a share price of K 35.10 whilst the last trade of 1,729,512 shares was transacted at a share price of K 34.90.

LASF is now a shareholder in the five (5) companies. The acquisition of the shares will provide the Fund an alternative income stream through the receipt of dividends. In addition, it has provided an opportunity for LASF to start achieving its investment diversification objectives.

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EFFECTS OF THE NAPSA ACT ON LASF OPERATIONS

The creation of NAPSA has brought various developments in the pensions industry. The challenge is the continued existence of statutory pensions schemes and other private occupational schemes since all new employees commencing employment on or after Ol February, 2000 are required to contribute to NAPSA on a compulsory basis.

The following implications have been identified:

(i) The Legal Position

Representations have been made regarding which Act (the LASF Act or the NAPSA Act) supercedes the other with respect to contributions to be made by new employees of Associated Authorities. Although the NAPSA Act requires all new employees of the Associated Authorities to join NAPSA before joining any other pension scheme with effect from 01st February, 2000, the LASF Act has not been amended to address this particular issue. Indications from parties consulted so far seem to suggest that there is a legal basis for challenging the mandatory joining of NAPSA by new employees of Associated Authorities.

(ii) Declining Membership

The requirement that post—NAPSA employees of Associated Authorities not belonging to LASF on a mandatory basis will lead to declining membership over the longer tenm This is because the amount of persons belonging to LASF is defined under the LASF Act and will not be augmented by any new members due to the NAPSA Act.

(iii) Declining Contributions

The fact that new employees are not required to contribute to LASF on a mandatory basis will cause shrinkage in the amount of money coming into the Fund. This is because the Fund will only be able to draw revenue via contributions from pre—NAPSA employees.

The effect of this will result in the Fund failing to meet its future liabilities as a result of declining contribution levels.

(iv) Government’s Liability in the Long Run

Should the Fund run into financial difficulties as a result of declining membership and the c onsequent lower level of c ontributions, there i s a likelihood that the requirement to cover up for any short—fall to assist the Fund to meet obligations to beneficiaries and retirees will fall on Central Government as it is the dejurere guarantor of the Fund.

Since LASF is a statutory pension scheme created by an act of parliament, the collapse of LASF as a result of the NAPSA Act will in future put pressure on Government to resolve the issue of the members who would remain unpaid. Management believes that such future pressures on Government could be avoided by reviewing the position of the NAPSA Act.

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