Unapproved Loan Schemes Expose Lapses in Governance at First Mutual Life

Harare, Zimbabwe | First Mutual Life Assurance (FML) has come under scrutiny following revelations from an audit that uncovered a US$3.5 million loss suffered by policyholders due to schemes initiated by management without board approval.

The report, issued after an investigation by the Insurance and Pensions Commission (Ipec), highlights that FML managers established an employee mortgage scheme in 2013 and a staff loan scheme in 2019. These schemes, described as a “feeding trough” for management, operated entirely outside the knowledge and oversight of the company’s board.

“For every dollar lent out by the banks as either a mortgage loan or staff loan, there would be a corresponding dollar invested in a money market deal,” the report notes. However, it adds, “the FML board was in the dark on this arrangement as there was no evidence of board approvals.”

The schemes proved disastrous, as the backing of long-term loans left management unable to disinvest funds in response to Zimbabwe’s volatile economic environment. This resulted in policyholders losing US$3,557,086 through the mortgage scheme and an additional US$563,767 via the staff loan scheme.

Further losses were flagged in the report, including a US$700,000 shortfall in interest owed to the pension fund. Additionally, directives from Ipec in 2011 to convert failed money market placements into a term loan and repay policyholders were not fully adhered to. By the end of 2017, over US$723,000 in unpaid interest remained outstanding.

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“Management fees were being charged on money market deals backing the long-term mortgage and staff loans, even though the fund manager did not exercise any discretion in placing the funds,” the report revealed, underscoring a lack of accountability in handling transactions.

The schemes were further criticised for their lengthy repayment terms, with mortgage loans spanning 15 to 20 years and staff loans lasting up to 82 months. Crucially, investigators found no evidence of board approval for these investments, as mandated by the company’s investment guidelines.

Despite these challenges, Ipec enforced measures to protect fund members from the full extent of the economic losses. The commission adjusted pension values upward to account for revaluation gains, ensuring that fund members experienced nominal growth in asset value, even as asset growth rates fell below inflation.

The findings raise questions about corporate governance and oversight at FML, particularly given the board’s apparent ignorance of schemes that significantly impacted policyholders and pensioners.

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