Pension funds too costly to Malawi employers

An analyst has said the mandatory contributory pension scheme which Malawi introduced in June 2011 is costly to some employers and has called on government to look into the issue.

Speaking on the sidelines of the Employers Consultative Association of Malawi (Ecam) workshop in Blantyre on Wednesday, chief executive officer for Nico Life Insurance Company Limited, Osman Karim, said according to the law, government is supposed to set a threshold and a ceiling for pensionable emoluments as provided under Section 10 of the Act.

“The minister [of minister] already established the minimum threshold for pensionable emoluments at K10 000 ($20) per month, but has not set a maximum limit. It is too costly for the employer without the cap as they are required to contribute towards the employees’ pension,” said Karim.

According to the World Bank’s 2013 Doing Business Report, Malawi’s mandatory pension scheme was a negative reform which worsened the country’s business climate.

The Act provides that employers must contribute 10 percent of salary or 7.5 percent until the end of 2012, while employees must contribute five percent.

But the employers present during the workshop said they needed the minister to look at the issue of capping the pensionable emoluments.

However, Ministry of Finance, Economic Planning and Development spokesperson Nations Msowoya in a telephone interview yesterday said they have delayed in coming up with some directives because they are constrained.

“We set up a Pension Directorate about five years ago, but we do not have the required human resource. We are also yet to appoint an administrator who will have to work hand in hand with the directorate,” said Msowoya.

Bearing in mind that Malawi experiences one of the highest inflation rates, Msowoya pointed out that the Pension Act provides for an inflation cover and it is the responsibility of members to choose a fund manager with the best inflation cover.

Apart from the capping of the pensionable emoluments, Karim also said Malawi should also be thinking of how to use the pension funds pointing out that there is a lot of money in pension contributions.

According to Karim, regardless of a few challenges in the implementation of the Act, the legislation has been welcomed.

The Reserve Bank of Malawi (RBM) in its June 2014 Financial Stability Report noted that the pension sector continued to register growth in assets with the resources registering 16 percent growth from K174 billion ($386m )recorded in September 2013 to K202 billion ($448m) by end of June 2014.

The central bank, however, noted that the main risk of the sector remained concentration risk due to limited long term investment options. But RBM is leading the formulation of strategies for the development of the capital market in Malawi to deepen the market to increase investment options, which will also benefit the pension sector.