Zambia uses pension funds to shore up debt-stressed economy  

Facing the brutal effects of prolonged debt restructuring – which has depressed liquidity and increased the economic burden for its citizens – Zambia will, for the first time, allow eligible contributors of a government-owned pension fund to partially access pension savings before retirement in an effort to boost the economy.

On 17 April, President Hakainde Hichilema signed a new law into effect that allows for the partial withdrawal of pension benefits for contributors who are at least 45 years old or have contributed to the National Pension Scheme Authority (NAPSA) for at least five years .

NAPSA, which had an investment portfolio of ZK71bn ($3.4bn) at the end of 2022, is setting aside ZK11bn (about $600m) for partial withdrawals by eligible contributors, who will be allowed to access up to 20% of their pension savings.

The 20% pre-retirement benefit pay-outs targeting about 600,000 eligible workers comes after the president passed a law to pay ZK5.4bn (about $240m) to around 150,000 members of the Zambia National Provident Fund, the forerunner to NAPSA, in December 2022.

Cost of living crisis

The ongoing debt restructuring process has left many Zambians distressed amid a cost of living crisis, which has created a major dilemma for Hichilema, who won the 2021 election on a promise to lift millions out of poverty .

“Things have been so bad and I have had to give up my business because there’s no money around,” says Phyllis Musongole, a former hotel chef who lost her job at the height of the Covid-19 era. 

“Once I get my 20%, I will use some of it to boost my business and also put a roof on my house so that we can move there and save on our monthly rental expense,” she adds.

NAPSA, Zambia’s largest pension fund with a net worth of around $12bn , manages retirement funds from civil servants and local employees of key industries, including mining companies, is the most liquid institution in the country, says NAPSA director general Muyangwa Muyangwa. It is also a leading investor in government securities and in most listed companies on the stunted Lusaka Securities Exchange.

“The ZK11bn we are injecting into the economy is a lot of money,” Muyangwa says. “You cannot predict the stimulation, but what we know is that this liquidity is going to spur a lot of economic activity and that’s what we need with this kind of reform.”

As an opposition politician before his rise to the presidency, Hichilema campaigned for allowing partial of pension benefits after the Patriotic Front (PF) implemented a deeply withdrawn unpopular bill to raise the state pension age from 55 to 65 . The PF move infuriated many Zambian workers in a country where life expectancy is around 63.

At the time, the PF said increasing the statutory retirement age was aimed at lessening pressure on the public pension fund struggling to meet its obligations to retired workers.

In an effort to offset the acute deficit of liquidity as the debt restructuring process continues to be delayed, the government has increased the disbursement of funds under the social cash transfer scheme and the citizens’ economic empowerment fund , an empowerment policy aimed to redress the lack of access to cheaper sources of funding for small indigenous businesses.

The decision to increase the constituency development fund – allocated directly to individual constituencies by the treasury – from ZK1.6m to ZK28.3m in 2021 has had little impact in stimulating economic activities, largely due to entrenched bureaucratic obstacles preventing its full actualization.

Hichilema said the partial withdrawal should be able to buttress existing efforts to improve money availability to lift the economy and improve consumer spending.

“When you combine these facilities, they provide a social safety net as we restructure the economy,” Hichilema said on 13 May upon returning from visiting the UK and Europe.

Future of pension savings

“This is a significant development in the social security system in Zambia and has the potential to stimulate the economy by increasing individual citizens’ investment into various economic ventures,” says Kaputo Chiwele, a researcher at Policy Monitoring and Research Centre.

“However, careful monitoring of the impact of the partial withdrawal on the sustainability of the pension scheme is necessary.”

This is because the partial withdrawal of a portion of a contributor’s pension savings before retirement age could lead to a reduction of total savings for each contributor , which could impact the sustainability of the pension scheme, he explains. 

The public pension fund in Zambia has a long history of poor management and many people have died without accessing their pension contributions. For some who have reached the statutory retirement age, the annuities are often too low to support a decent living , thereby failing to inspire willing contributors.

However, Muyangwa says the partial withdrawals are not a threat to the sustainability of NAPSA.

“There is no way ZK11bn paid over a period of time is going to be a threat to NAPSA. Most of our members are young and the older ones are few,” he says.

“Our bigger liabilities are only coming way in the future . Right now the fund is skewed in such a way that we can meet the pension bill using contributions without even touching our investments.”