Gandy Gandidzanwa and Itai Mukadira

Most retirement fund members continue to struggle to secure housing finance despite having accumulated significant pension fund credits. Most are not able to buy residential properties, not only in the urban centres, but also even in the hometowns of the rural areas they retreat to at retirement.

The general home loan market is characterized by a predominance of mortgage products with very high interest rates. The main players in this regard are profit-seeking building societies and commercial banks focused primarily in the middle to high income earning groups.

A solution for the industry, by the industry, is now long overdue.

Unique Real Wealth Creation
Pension-backed home loans provide access to housing finance for members who would otherwise not be able to afford current market products, or not be considered for other reasons. This is an alternative form of housing finance where the loan is secured by a retirement fund member’s savings instead of a conventional mortgage bond.

A pension-backed home loan scheme is a unique retirement fund investment solution where there is direct real wealth creation for the real owners of capital. Members enjoy the dual benefit of using their retirement savings to secure a home loan while still maintaining their retirement fund, allowing for the accumulation of home equity and pension growth simultaneously.

As with any other housing finance, pension-backed home loans can be used for buying land, building on acquired properties, buying or renovating completed properties, and other such similar investments in real assets. The loan schemes can also be designed with a strong financial empowerment drive through the financing of developments of members’ properties that are established with income generation purposes in mind. Such developments would include, but are not limited to, borehole drilling, solar panels installation, irrigation system setting, boundary fencing, and others.

Critical to note that members are not withdrawing from their retirement savings to finance the property purchase or developments. Their retirement savings remain invested in their pension funds and continue to grow. Thus, their retirement savings are preserved while they are accessing a facility from their pension fund for financing their dream home. As the pension fund remains intact and continues to grow with the pension fund’s investment strategy remaining uninterrupted, the member simultaneously benefits from the compounding growth of their retirement savings while also owning a home.

Attractive Arrangements
The loan is typically repaid over an agreed-upon period, usually limited to a member’s retirement age, with the understanding that the pension fund serves as a guarantee. This arrangement normally comes with potentially lower interest rates when compared to other forms of borrowing. It also is usually designed with no requirement to register a bond. The application process is notably swift and efficient. Monthly repayments are seamlessly deducted from the member’s salary, enhancing convenience.

The loans offer flexible repayment options with no early settlement penalties too. Unlike with conventional housing finance, members can make lump-sum payments and settle the loan much earlier and not be penalised for it. They can also be designed to accommodate variable monthly repayments to suit members’ financial situations.

One of the long-known shortcomings of the pension fund industry is that members are either totally disengaged on matters of their retirement savings or are overly engaged for the most wrong reasons. Pension-backed home loans draw members to engage with their retirement savings in a responsible and meaningful way as they see the immediate and tangible benefits from their pension fund.

Under a very difficult economic climate, Zimbabweans have shown unrivalled resilience and a deep determination to put a roof over their heads. The construction sector remains one of the most steadily growing sectors of our economy. A sizeable financial boost from the pension fund industry would go a very long way in helping many realise their dreams of owning a decent dwelling during their lifetime.

Alternative Investment
Looked at from the pension fund side, pension-backed home loans can be a smart consideration for a pension fund’s investment strategy. Mortgage loans can provide steady and predictable income streams from interest payments, which can contribute to the fund’s overall stability and predictability of returns.

Including pension-backed home loans in the investment portfolio can diversify a pension fund’s holdings, reducing risk by spreading investments across different asset classes. Because the loans are backed by the member’s pension savings, the risk of default is lower compared to conventional loans, offering a safer investment.

By allocating funds towards home loans, pension funds can diversify their portfolios and achieve the triple objective of earning attractive returns, within acceptable levels of risk, while simultaneously positively contributing to the social responsibility of putting a roof over their members’ heads.

Wider Socio-Economic Benefits
Beyond the immediate objectives that the schemes are designed to meet, they also have wider economic and societal benefits that they bring forth.

The schemes promote financial inclusion. Members who otherwise would not have had access to or qualify for conventional loans due to limited credit history or income levels benefit from the schemes.

Rolling out the schemes en-masse has the potential to bring back confidence and trust into the pension funds industry as it will be seen as, for the first time, deploying the industry’s capital to directly benefit retirement members in real and tangible ways.

Housing affordability and ownership is a perennial headache for both society and the Government – pension-backed home loan schemes can offer a viable solution. By easing the upfront financial burden on homebuyers, the schemes make homeownership more attainable for middle- and low-income individuals and families.

Industry-wide pension-backed home loan schemes will help minimise rural-to-urban migration by developing rural business centres and town councils thus upgrading their economies. Such a drive would directly be supportive of the Government’s rural industrialization agenda.

The initiatives would also stimulate economic activity as increased homeownership fuels activity in various sectors. Home buying often comes with investing in property-related goods and services, such as furniture, appliances, renovations, and landscaping, which will boost local economies and create jobs.

System Abuse Must Be Condemned
There are potential drawbacks though that members need to bear in mind. If poorly designed and irresponsibly used, there is the risk of members losing a portion of their pension. Also, if they default on their loans, it is possible that their retirement savings will be adversely impacted.

Any attempts to be creative and design schemes that are not structured for financing property purchases and developments are likely to backfire and blow up in the hands of members. Such so called creative forms of lending, including via certain employer schemes, that are for non-residential property acquiring or developing purposes should be discouraged completely. Not only are they in conflict with the spirit of retirement savings they are also an outright violation of regulatory provisions.

Similarly, arrangements with financial institutions where the pension fund advances a loan that is treated as a short-term money market investment, earning only money market type of returns, while members are made to borrow at exorbitantly high interest rates should be equally condemned. Same applies to arrangements where some building societies and commercial banks enter into debt arrangements with pension funds at comparatively low rates, have the debt sit on their balance sheets and then issue out loans to members at significantly high interest rates for their own accounts. Pension funds are not, and should never be used as, sources of cheap money for profiting from by these institutions.

Conclusion
Pension-backed home loans can be a valuable tool for wealth creation for pension fund members, particularly in facilitating homeownership, which is a significant asset for many individuals. They can also be a strategic component of a pension fund’s investment strategy, offering stable returns and diversification from traditional asset classes.