Have you assessed all the business risks?

Have you assessed all the business risks?


Every commercial business from small to large has goals it seeks to achieve, one of them is being profitable into the foreseeable future, that is, be a going concern. Business risks come in as threats to the company’s ability to achieve its financial goals. These threats can be externally or internally generated in relation to the environment the business is operating in and the type of industry it is involved in. It is the uncertainties that arise in the business environment that influence business risks to be high or low.

Though business risks are broad, they can be broken down into several categories. Examples of types of business risks include compliance/legal risk, economic risk, reputational risk, fraud risk, operational risk and competition risk. The degree of business risk may vary from one business to the other and this is highly influenced by nature and size of the business. For instance, a financial institution bears more risks than a standardised goods retailer.

Nowadays, with the world being a global village, we have seen a rise in complexity and uncertainty in the business environment. There are increased competitive pressures, technological advances and dynamic changes in customer taste and preferences hence increased business risks.

Currently, as the effects of COVID-19 pandemic continue to evolve, uncertainty in the business world continues to rise hence posing a higher operational risk. The emergence of the pandemic led to many business operations being disrupted, making business continuity a major issue for many organisations. However, many businesses have managed to stay afloat and used the pandemic-induced uncertainty as a source of attaining accelerated growth by being quick to adapt to changes.

For the pension fund industry, here are some of the risks to be on the look out for as you plan and manage the funds.

Legal & Regulatory Risk

This can be defined as the likelihood of adverse consequences arising from the failure to comply with all relevant laws and regulations. Risks concerning changes in legislation in the future, complex reporting frameworks and risks of complying with inappropriate or unclear regulation can also be put in this category.

The legal framework that shaped our pensions’ fraternity was enacted during the pre- independence era when the Zimbabwean dollar was more valuable than other foreign currencies. The Pensions and Provident Fund Act limits the investment exposure of pension funds in foreign countries. Despite several positive amendments, the legislation is not flexible enough to consider the ever-changing trends in the management of pension funds.

Pension funds are additionally required to allocate at least 20% of the assets or investments in their portfolios to specified prescribed assets, such as locally registered securities that are issued by or guaranteed by the government or a local authority. The implication is that in order to achieve the legislative criteria for prescribed assets, pension funds sometimes need to disinvest in lower risk or higher yielding investments. Compliance to Prescribed Asset ratios present hurdles for many pension funds because it is exceedingly challenging to find competitive and quality prescribed assets in the Zimbabwean market.  Therefore, non-compliance with legislation and compliance with unfavourable mandatory requirements exposes Pension Funds to legal, regulatory, liability, exchange rate, hyper-inflation and market price risk.

Operational Risk

This can be defined as the risk of losses resulting from inadequate internal processes, people and systems (whether these are internal to the regulated entity or in a service provider). This risk arises mainly from failures in transactions with counterparties, ineffective decision making and inadequate or insufficient human and technical resources. Specifically, the pension fund industry is an industry that requires high skilled labour in the form of actuaries, chartered financial analysts or chartered accountants. This as a result of complexity that surrounds the work done in the pensions’ sector as there is a lot of analytics that is done which requires a specialised skill.

At the moment, there is a massive brain drain of the skilled workers in the pension fund industry as a result of better job offers and security offered to them from foreign companies. This has resulted in disruptions in the industry presenting a major operational risk. This further presents a risk of disruption of operations which also has an impact on the going concern of many pension fund related entities as a result of the massive brain drain.

Reputational Risk

Reputational risk can be defined as the damage that can occur to a business when it fails to meet the expectations of its stakeholders or the risk arising from the potential that negative stakeholder opinion or negative publicity regarding business practices will adversely impact current or projected financial conditions and resilience, resulting in a decline in the customer base or costly litigation.

Between 2004 and 2009, many people lost their lifetime savings. Due to this, many people in Zimbabwe have lost trust and confidence in pension funds. They view such institutions as instruments for milking their money. This poses a reputational risk in the industry for pension fund related companies. Coupled with the past reputational damages and the uncertain economic environment, the pension fund industry faces a high reputational risk that has a continuity impact on the industry as a whole as the contributors always have a questioning mind as a result of reputational damage. With that context, a lot has to be done to sanitise the reputation and proactive action has to be taken by several stakeholders in order to safeguard their reputation from potential future risks.

Liquidity Risk

Liquidity risk can be defined as the risk that a pension fund institution will not be able to meet its payment obligations as they fall due, or the entity’s inability to recover funds.

Since the inception of the multi-currency regime in Zimbabwe, pension funds have been suffering because of the cash crunch caused by increasing incidents of rental defaults from tenants in their buildings, erosion of tradable investments and subdued income growth. Most employers are facing viability challenges due to the current economic turmoil and therefore they are unable to remit monthly contributions to pension funds.

The resultant liquidity crunch means that most of these pension funds will be unable to make pension pay-outs in foreign currency or to meet claims in time. The liquidity risk has been further compounded by the fact that pension funds are invested in properties and rely heavily on rental cash flows. A high default rate in rentals by sitting commercial tenants has been experienced since the inception of the multi-currency regime resulting in reduced cash flows in the pension funds’ portfolio.


In conclusion, even though business risk is unavoidable, it can be managed or mitigated, which is the core task of management in every organization. By applying smart risk management frameworks, a business can enjoy larger profits and achieve its goals.

This article was written by Eugine Rukuni, Audit Associate at Kreston Zimbabwe Chartered Accountants and is available on request at info@krestonzim.com

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