CHALLENGES FACED BY THE DEPARTMENT

Background to Operations Relating to Finance and Accounting

Over the years, the operations of the Department faced various challenges in executing its functions relating to Finance and Accounting. Among some of the challenges include:

(i) Manual Accounting System

Since the inception of the Local Authorities Superannuation Fund (LASF) in 1954, the Fund had maintained manual financial and accounting systems in processing its transactions. With the growth of computerization in the 1980's and 1990's, the Fund still remained behind with manual processes.

(ii) Financial Regulations

The Financial Regulations document was written and approved by the Board in 1986. The financial policies and regulations have not been reviewed and updated over a period exceeding 15 years. This allowed inconsistent application in implementing financial policies and transactions.

(iii) Lack   of  Documented   Guidelines   in   other   Accounting Functions

Financial functions such as Budget preparation process and year end procedures are not documented to provide standardized approach aimed at enhancing efficiency.

(iv) Departmental Overlap

Prior to the implementation of the new organization structure, the old structure had a lot of limitations in operations. The former Accounts Department was on paper the operations department whose tasks were apart from finance functions, was expected to perform pension fund management and investments. The core functions relating to pension fund management and investments were not addressed as core principles of social security.

The following social security principles n eed to be captured i n any Pension Scheme:

1. Membership;
2. Financing and Contributions;
3. Investments; and
4. Benefits.

(v) Lack of Clearly Defined System in Paying Benefits

Given the fact that the Fund has a backlog of unpaid benefits, LASF lacked a clearly defined system of clearing the unpaid benefits. The mode of selecting payments to be made was more of being reactive and hence lacked transparency.

(vi) Other Operational Issues

Like other Statutory Pension Schemes such as former Zambia National Provident Fund and Public Service Pension Fund, the Fund has had an inherent problem regarding weak financial base arising from non compliance in the remittance of contributions.

back to top

Management's Strategic Approach in Improving   Finance and Accounting Functions

In order to address some challenges faced by the Fund in functions relating to Finance and Accounting, Management identified the following in its Five Year Strategic Plan that was implemented on 01st January, 2001.

(i) Acquisition of the PASTEL Accounting Package

In 2002, LASF acquired the PASTEL Accounting Package Version 6 in order to computerize its financial and accounting systems. This was a stepping stone in moving away from the manual accounting systems used in the Fund for over 40 years.

(ii) Updating of the Financial Policy and Regulations

The Department embarked on a project to review and update the Financial Regulations that were written in 1986. The process included developing financial policies that are in line with the current International Accounting Standards (IAS).

The process to review and update the Financial Policy and Regulations Document was completed during the last quarter of 2004. The Policy Document shall be presented to the Board for consideration and approval before the end of the second quarter of 2005.

(iii) Formulation of Budget Manual and Year End Procedures

The process of formulating the Budget Manual is currently in progress. The draft framework document outlines the Budget Policy and Guidelines to be adopted by the Fund during the budget preparation process.

Once finalized, it is expected that the draft Budget Manual will be presented to the Board by the end of the third quarter, 2005 for consideration and approval. It is further expected that the preparation of the 2006 Budget for LASF will be under the new guidelines and a standard format for Departments to submit their Budget requirements.

The Fund also plans to produce the Year End Procedures Manual aimed at providing guidelines for year end transactions such as:

(iv) Strengthening   the   Identification   of   Core   Function   of Pension Schemes

The streamlining in creation of the Investments Section in the Finance & Investments Department has shown a positive approach the management of the Fund's investment portfolio. The Financial Section now concentrates on the finance and accounting activities

(v) Formation of a Management Allocations Committee

In 2001, the Management Allocations Committee was formed and tasked with the responsibility of providing an efficient and transperant system for the disbursement of funds. All contributions, investments income and other form of income are subjected to the Allocations Committee to allocate funds towards paying of benefits and administrative expenses.

Deliberations of the meetings are documented, minutes endorsed and filed for future reference.

The Committee meets on average every fortnight or as funds are available under the Chairmanship of the Managing Director. All Directors and Managers heading Departments are members of the Committee.

back to top

Background to Operations Relating to Factors that Affected Investments Growth

Historically, the Fund's investments were mainly focused of real estate and bank deposits as there were limited investment options available. A large part of the Fund's investment was real estate in the commercial building and residential houses.

After the liberalization of the Zambian economy in 1991, the establishment of the Lusaka Stock Exchange (LuSE) and the social security reforms which saw the creation of the National Pension Scheme Authority (NAPSA), the Fund has been faced with challenges that affected its investment growth.

(i) Amendments to the LASF Act

The various amendments to the LASF Act over the years created cashflow strains on the Fund as no surplus funds were available for investments. The limited funds have been used to clear the back log of unpaid benefits that were as a result of claims placed on the Fund after amendments to the Act. The most notable amendment is Act No 27 of 1991 (22 years service) which resulted in over 4,300 members retiring. This put claims on the Fund of more than K13.4 billion in 1996 when the Act was repealed.

All amendments were made without actuarial advice to assess the financial viability of the scheme

(ii) Lack of Investment Policy and Guidelines

LASF did not have written guidelines on where to invest and a policy on the management of investments.

(iii) Lack of a Diversified Investment Portfolio

LASF's investments were mainly in real estate prior to 2000. The return on real estate investments has until recently been on the decline and can not match the costs relating to the payments of benefits.

(iv) Lack of Clearly Defined Organisation Structure Addressing Investments

The Investments Section was not clearly defined in the old structure as a core unit of the Fund

(v) Lack of Basic Pension Management and Actuarial Skills

This has been a problem for almost all pension schemes in Zambia as pension fund manager lack sufficient training in pension fund management and actuarial skills. Zambia currently does not have any university or college offering basic pension fund management and actuarial skills.

back to top

Management's Strategic Approach Investments in Managing

LASF Management realized that there was need to review the investment strategy of LASF in order to achieve a favourable investment growth.

(i) Incorporating Investment Strategies in the Five Year Strategic Plan

During the process of developing the Five Year Strategic Plan, various investment strategies were identified and documented. The strengths, weaknesses, opportunities and threats with regard to investments are outlined in the Five Year Strategic Plan.

(ii) Formulation of the Investment Policy Document

Section 24 of the Pension Scheme Regulation Act require each Pension Scheme in Zambia to have an Investment Policy. In this regard, LASF Management developed an Investment Policy document in 2002 which outlines the Fund's investment objectives.

(iii) Establishing an Investments Section

The Investment Section has now been separated as an independent unit in the Finance & Investments Department. Staff in this Section perform investment functions only.

(iv) Capacity Building on Investment Appraisal and Actuarial Skills

In order to achieve the objectives set in the Investment Policy, Management through the Human Resources Department has continued to provide the necessary training for staff to enhance investment skills.

(v) In House Investment Monitoring Systems

The development of in-house investment monitoring systems commenced during the month of February, 2005. It is hoped that once the in-house investment monitoring systems are finalized, the tracking of maturity profiles for investments will be simplified.

The development of in-house investment monitoring systems being developed relate to:

1. Tracking the value of equity as a result of movements in
   share prices;
2. Tracking    maturity     profiles     for     Treasury     Bills,
   Government Bonds and Short Term Bank Deposits
3. Computerised record keeping of the Fund's investment
   portfolio through designed spreadsheets to suit various
   investment assets.

back to top

THE FUND'S INVESTMENT POLICY

Investment Objectives set in the Investment Policy

The primary objective is capital preservation, investment returns and liquidity;

1. Management of return versus risk in ensuring that investment funds are managed within acceptable parameters of risk
2. The investment portfolio must be rebalanced overtime to meet the investment environment as they arise;
3. Resource allocation and setting investment portfolio limits;
4. Disinvest from investments with return below acceptable performance;
5. Maintain adequate investment records.

1. Any company in which the members of the Fund, Board members, the Chief Executive or other members of staff of the Fund or immediate blood relatives of such a person, holds more than 5% of outstanding shares.
2. Equity investment or lending to companies that have not operated profitably for the immediate past three years as confirmed by audited Financial Statements.
3. Speculative investments eg forward contracts.
4. Direct lending to Government except through open market transactions such as Treasury Bills and Government Bonds.
5. Companies not listed on the Stock Exchange,
6. Government/state owned or controlled enterprises

Allowable Investment Instruments set in the Investment
Policy

Section 12 of the LASF Act and the Investment Policy allow the Fund to invest in the following financial instruments:

1. Government Bonds and Treasury Bills
2. Fixed Term Bank Deposits
3. Foreign Exchange Holdings/Deposits
4. Collective investments (Unit Trusts)
5. Corporate Bonds and Loans
6. Ordinary and Preference shares
7. Commercial papers/ Bankers acceptance
8. Commercial/office/residential buildings

Current Approved Investment Asset Allocation Limits
The current investment asset allocation limits as approved by the Board is as follows:

Section 8.2 of the Investment Policy allow investment limits and resource allocation be reviewed annually or as need arises subject to Board approval.

back to top