Revised FLP paper on the proposed ‘reforms’ to the FNPF
The long term viability of the FNPF can be maintained
without making cuts to the current rates of pension benefits.
Besides, pensions are too important a matter to be left to be
decided upon without free and informed public debate and
without considering other available options. Ideally, any
changes that need to be made should be left to a
democratically elected government with the mandate to carry
out such reforms.
Introduction
Years of mismanagement and plundering is threatening the long term
sustainability of the Fiji National Provident Fund, despite the fact that
it collects close to $300 million annually in members’ contribution.
The Fund is now proposing a series of drastic changes recommended by
hired foreign consultants, the most damning of which is a reduction in
the rates of annuity. Any such reduction will be a gross injustice to the
workers of Fiji who have contributed for years in the expectation that
they will receive adequate pension to be able to retire and live in
dignity in their old age.
The current annuity rate of 15% is to be reduced further to 9% under
the proposals now being considered by the Fund. Should this happen,
the ordinary worker will be lucky to pick $50 a week on retirement –
hardly a liveable payout – and well below the current poverty line of
$185 a week! It is to be noted that the annuity rate has already been
progressively trimmed from 25% to 15% in the past 10 years.
If the Fund’s viability is being threatened today, the workers should
not be penalised for it. The State must take full responsibility for the
current crisis at the FNPF – largely as a result of questionable
investment activity and failure to conduct timely sustainability reviews
of the Fund. A number of very large poorly or negatively performing
investments were made with the express approval of successive
governments and were influenced by political considerations rather
than the interests of the members of the Fund. As such the State must
be held accountable. (More on this later in these submissions).
2
The so-called reform agenda
The Promontory Financial Group of Australia LLP was engaged last
year by the FNPF “to provide technical assistance to develop a
legislative framework for the prudent and sustainable delivery of
retirement savings and related services that are in the best interests of
the people of Fiji in the long term”.
The Promontory team comprised Ms Shauna Tomkins and Mr. Stephan
Mason. Ms Tomkins describes herself as an expert in financial sector
reform and policy development. Mr Mason is said to be an expert in
legal drafting for the finance sector and has previously been a member
of the Australian Law Reform Commission.
Regrettably, the contents of the Policy Paper prepared by them are
significantly devoid of an understanding of the socio-economic
conditions applying in Fiji.
It fails to recognise that 65% of Fiji’s workers are paid wages below the
poverty line. They, therefore, have little capacity to accumulate savings
from which to supplement their housing loan repayments, children’s
education expenses, and expenditure related to funerals, marriages,
medical treatment etc. They remain reliant on the FNPF for such
contingencies.
The Policy Paper makes no reference to, and obviously lacks
consideration of, the fact that unlike Singapore and Malaysia where
employment opportunities are plentiful, the employment market in Fiji
has remained depressed for years now. A laid-off worker may remain
unemployed for several months, if not permanently. There being no
unemployment benefits to which he could seek recourse, the
alternatives are to either starve, or steal, or apply for partial
withdrawal of his contributions with which to support himself and his
family until he lands another job.
The objective
The objective of the current exercise, as stated, is to provide financial
security after retirement. One must ask: Financial security to whom?
If it is intended to provide financial security to the retiree, then it
would seem incongruous, if not absurd, that consideration be given to
further reduce the rate of pension from 15% of the Members’
contribution to the proposed rate of 9%.
3
Given that 65% of the workers in the country are paid wages below the
poverty line, they will hardly accumulate sufficient savings, based on
the current contribution rate of 8%, to generate an annuity which
would provide for their basic needs in their retirement years.
The example given in the Policy Paper (fig1,P16) of a 20-year old
earning $10,000, exposes the absurdity of the whole exercise. According
to the calculations, when he retires at age 55, he will receive a weekly
pension of $110. This is hardly a liveable pension even now – in 35
years time it will be mere peanuts. The plight of workers who are
drawing well below poverty level wages, will be even worse. They will
be lucky to get a monthly annuity of $200 or $50 per week – well below
the poverty line! Who can survive on that? Is the exercise designed to
reduce our people to the state of paupers?
If the objective of the reform is, indeed, to provide financial security to
the retiree, it is then imperative that a totally different perspective be
employed to achieve that purpose while ensuring the long term
viability and stability of the Fund.
The focus should be to maintain the existing level of pension (annuity)
benefits at 15% and increase it gradually to attain an annuity rate of
25% from where it started in the 1990s.
Can this be done? Yes, it can be done provided you have the inclination,
the wisdom to seek better, more humane alternatives, and the political
will to proceed.
What has endangered the Fund’s viability?
We are told by the officials and the consultants that there are two
principal reasons threatening the Fund’s sustainability:
• unrealistic annuity rates which were fixed without sound
actuarial assessments
• high incidence of early withdrawals for compassionate reasons
We disagree, and submit that the Fund’s viability has been endangered
more by the following factors, rather than the rate of annuities or early
withdrawals, as claimed by the officials and their advisers:
4
• Incompetent financial management
• Corrupt deals and practices relating to investments
• Poor governance
• Imprudent investments – purchase of overvalued ATH shares
in 1998, GPH, Natadola, Momi Bay, Tappoo City and several
others
• Depressed economic conditions in the past 25 years
attributable to political instability (coups of 1987, 2000 and
2006) resulting in lack of investment, low wage and
employment levels, and substantial sums paid out in early
withdrawals over the years (since 1987) due to significant
out migration of workers as a result of the coups
• Failure to gradually increase the contribution rate to achieve
adequate levels of Reserves – the last increase effective 1st
January 2000 from 7% – 8%, was initiated by the Labour-led
Government
It was envisaged in the Tripartite Forum in the early 1980s
that the rate would be gradually increased to 12% each. It
was largely pressure from the employers that prevented this
from materialising.
• Reducing the retirement age from 60 to 55 years thus
permitting early access to retirement benefits
If not for the negative developments outlined above, we would not
today be in a panic mode to salvage the long-term viability of the
Fund. Surprisingly, the Promontory Policy Paper makes no
mention of these very significant and pertinent causes of the Fund
being at risk today.
The question then is: What is the appropriate way forward which would
achieve the twofold objective of ensuring stability to the Fund’s long
term viability and, at the same time, provide a reasonable level of
annuity to retirees?
5
The Proposals
The immense importance and significant role of FNPF as the nation’s
top most financial institution must be thoroughly understood. First and
foremost, it is a Pension Fund and its first duty is to protect its assets
and grow them through prudent investment activity so that it can
provide its members adequate (liveable) levels of financial security in
retirement. The Fund’s priority should be to improve on and extend its
range of benefits.
1. Investment Rules
Investments by the Fund must be in accordance with the rules applying
to investment of Trust funds. The FNPF Act must be amended to
restrict investments accordingly. Indeed, they were so for many years
but were relaxed by the Rabuka Government in 1998 as a prelude to
the ATH share scam, and then further relaxed by the Qarase
government in 2005 to permit investments in resort development.
These relaxations have cost the Fund $600 million in bad investments.
2. Overseas Investments
Investment of funds abroad must be permitted up to an amount
negotiated with the Reserve Bank annually. Any losses incurred as a
result of recall of these funds at the RBF’s instance must be made good
by the Bank.
3. Losses resulting from imprudent investments
Currently over FJD 500 million worth of investments made in hotels
and other projects are generating a negative return. The write down of
assets in Natadola, Momi and ATH (approx $600m) constitute capital
losses which must be made good by the State.
We are familiar with the recent Natadola and Momi Bay saga but the
scandalous investment in ATH shares appear to be well forgotten.
This highly questionable investment was the purchase of a 49% stake
in Amalgamated Telecommunications Holdings (ATH) for a
grossly over-valued sum of $253m in 1998 by the SVT Government. In
fact, workers funds were used, without due diligence, to bail the then
government out of its financial woes prior to the 1999 general elections.
6
The Fiji Labour Party had objected vigorously in Parliament to the
deal. At the time the next highest bidder, Cable and Wireless, was only
willing to put up $91 million for a 49% stake in ATH.
Then in 1999, the FNPF paid another $23m to acquire a further 2%
stake in the ATH, taking its shareholding to 51% and securing
management control.
But by 2000 the value of FNPF’s 51% stake in ATH fell by a massive
$225 million to a mere $51.7m. After the huge payout by FNPF, ATH
noted that its total assets were lower than its paid up capital. A capital
reduction exercise was then approved by the Court resulting in the par
value of shares being reduced from $1 to 25c per share.
This was a massive rip off of the workers by the SVT government. It
used $276m of the workers’ money to buy shares which were, at best,
worth only one/third ($95m) of that sum – a loss of $181m.
It cannot be denied that these investments were driven by political
considerations and made with the approval of the Cabinet. The State
must, therefore, be held accountable and it must restore these capital
losses to the Fund. The decision to invest in these ventures was a
political decision imposed at the time on the respective Boards of the
FNPF. As such, the State stands liable.
If this huge amount were restored to the Fund, it would immediately
provide the needed stability and there would be no need to reduce the
rate of pension. The restoration of this huge sum need not be made all
at once but spread over a period of say six years at $100m annually.
4. Retirement age
Access to retirement benefits should only be available after attaining
age 60. Accordingly, the retirement age should be increased to 60
years. This will mean a longer working life for the member and
retention by the Fund of the members’ savings for a longer period (5
years) which will be beneficial to both.
The argument that retirement at 55 will create employment
opportunities for the unemployed is self defeating and without merit.
At 55, most workers are physically and mentally fit and can contribute
effectively to the economy.
7
Shortening the working lives of some to provide employment
opportunities for others is not the answer to our serious
unemployment problem. The answer lies in creating the requisite
conditions to expand (grow) the economy – upholding democracy and
strengthening democratic institutions, providing political stability and
an acceptable legal framework to promote investment etc.
5. The contribution rate must be increased
The current rate of members’/employers’ contribution of 8% each has
been in place since 2000. In the past 11 years, inflation and devaluation
of the Fiji dollar have eaten considerably into the purchasing power of
the dollar.
As a result of depressed economic conditions and employer pressure,
wages have not kept pace with increases in the cost of living. Workers
on the middle and lower pay scales will, therefore, not be able to
accumulate a pension sufficient to satisfy their most basic needs unless
the contribution rate is increased over a period of time (5 years) from
the current 8% to 12% each.
The consultants have made frequent references to the EPF and CPF of
Malaysia and Singapore and are recommending for implementation
several measures copied from those Funds. By the same token, they
should have recommended an increase in the contribution rate to
ensure the Funds’ sustainability, and to enable the worker, particularly
in the lower wage strata, to accumulate savings sufficient enough to
provide him a decent annuity.
For information, the rates of contribution in Malaysia and Singapore
are as follows:
Malaysia: Employee 11%
Employer 12% 23%
Singapore: Employee 20%
(up to 55 years)
Employer 13% 33%
8
In Singapore, the rate for the employee is higher than that of the
employer because almost all workers use their savings in the CPF for
benefits other than for retirement purposes, such as healthcare, home
ownership and insurance schemes for family protection.
An increase of 2% (1% each employer/employee) in the contribution rate
would fetch an additional income of approximately $37 million
annually based on the income figures in the Fund’s 2010 Annual
Report. When the suggested level of 12% each is achieved, the
additional income generated would (based again on 2010 figures) rise to
$146million.
The 50% increase in the Fund’s income thus generated plus the
restitution of some $600m by the State will be more than sufficient to
achieve long term sustainability and permit the annuity rates to rise
gradually from the current 15% to between 20-25% over a period of
time.
The progressive increase in the rate of contribution should commence
no later than 1st January 2012 and be spread over a period of five (5)
years. By 2017, the contribution rate of 12% each should be in place.
Can the economy afford such an increase?
The answer is yes. Although stiff resistance is anticipated from the
employers, using the much worn out arguments of the past, the
government should demonstrate the political courage to do what is
right for the people of Fiji.
For too long, the workers of this country have been used to pay the
price for the parasitical tendencies of irresponsible governments and
unconscionable employers.
Separation of Accounts
The proposal to split a member’s contribution into two separate
accounts requires further thought. Promontory argues that doing so
would refocus the scheme on the objectives of saving for old age.
Thus, a Preserved Account would be created to which would be credited
70% of contributions. This account would be strictly preserved until
entitlement. Second, a General Account would be established to which
would be credited the balance of contributions plus any voluntary
payments.
9
The balance on the General Account would be available for early access
for medical, education etc. For housing, a one-off access to an additional
amount in the Preserved Account may be considered provided all future
contributions are paid into this account to reinstate the withdrawn
sum.
Whilst the proposal may look sound, the reality is that at the current
rate of contribution of 8%, some 65% of the members who draw below
poverty level wages will not be able to accumulate sufficient savings for
the required deposit on a house or plot of land even after working for
say 15-20 years. Little wonder squatter settlements are sprouting
everywhere.
It is, therefore, imperative that the contribution rate is increased so as
to enable the Fund’s members on lower wage incomes to have sufficient
funds accumulated for the purpose of acquiring a home.
Rate of Return
The rate of return to the member is pegged at 4% in the Promontory
report. This low rate, it seems, is recommended in order to siphon off as
much of the investment income as possible to building up the depleted
Reserves of the Fund. But the Reserves would be taken care of if the
State makes restitution of $600m as earlier stated.
A 4% rate of return will be punitive to 65% of the workers who
are paid poverty level wages. It must be emphasised that almost 70% of
the contribution income derives from workers in the lower wage strata.
We propose that the rate of return be fixed at 6.5% (minimum). Interest
rates on members’ savings in the past 17 years have ranged from a
high of 8.5% to 5% at the lower end, giving an average of 6.75% over
the period.
Investment in Government securities which constitute almost 60% of
the Funds’ lending, yield a return of around 10%. But this is offset to a
great extent by non-performing or poorly performing investments thus
reducing the overall rate of return – 6.4% in 2010, compared to 7.09%
in 2009.
Attaining an overall rate of return of around 9-10% is absolutely
essential to ensure the Fund is in a position to make adequate transfers
to its Reserves while guaranteeing a reasonable rate of return to its
members, as suggested above.
10
Current rates of annuity must be protected
The proposal to reduce the pension rate is neither warranted nor
necessary, and will be a gross injustice to the workers of Fiji. It can be
avoided if the proposals in these submissions are implemented.
The existing rate of pension must be protected and enhanced. It is
wrong in law to alter pensions to the disadvantage of the recipient.
Pensioners have made commitments based on their current rate of
pension – drastic cuts to the rate now will create considerable hardship,
particularly, as FNPF’s pension is not indexed to the cost of living, and
is generally inadequate for 65% of the Fund’s members who are paid
below poverty line wages.
Lump sum withdrawals
The option to Lump Sum withdrawal on retirement should be left open
to the members. If they wish to withdraw the total sum standing to
their credit then so be it. They must not be forced to convert it into an
annuity against their wish.
It makes more sense for a member to receive a lump sum which he may
re-invest to start a small business to support himself and his family
rather than receive a pittance as annuity which will be absolutely
inadequate to provide for his basic needs. The choice should be left to
the member.
Withdrawals on Migration:
The proposal by the consultants to withhold a members’ contribution on
migration or have it transferred to a similar retirement scheme in the
migrant’s new country of residence, under negotiated reciprocal
arrangements, is not supported.
Nor do we support the recommendation that where no reciprocal
arrangements exist, the amount standing to the credit of the member
be withheld for a waiting period of 12 months (para 76 of the Policy
Paper) to ensure that early payment for the purpose of migration is
genuine!
An exception is made where the amount standing to the credit of the
member is small, in which case it can be released on migration to save
the Fund the cost of small value accounts.
11
The raison d’etre for introducing the provision is that a member
declaring that he is migrating, is able to withdraw his funds only to
return in 1 to 2 years to rejoin the Fund.
We find this proposal or intended restriction on a member to access his
savings upon migration a violation of his rights. The consultants admit
that hard data on this “was not reviewed” but, astonishingly enough, go
on to recommend that “…a policy may nevertheless be formulated and
supported by Law without the need to quantify the size of the problem”.
This is a most irresponsible approach, particularly when the intention
is to deprive some one of his entitlement, albeit temporarily.
In most cases, those migrating need the money to set themselves up in
their new country. It can be an expensive affair and they have a right
to utilise their savings to meet this contingency.
If for some reason, the person returns after a while and seeks to rejoin
the Fund upon being re-employed, we don’t see anything wrong with it.
He would be a new member, beginning afresh, and would not carry
forward any of his previous benefits – so what is the fuss about?
In my view, this proposal is harsh and without justification, and should
be rejected.
In any event, it does not make sense to withhold the savings for a short
period of 12 months, as recommended. Hardly anyone migrating is
likely to return within that period.
Indexation of Pension to the cost-of- living
Currently, the FNPF pension is a fixed lifetime sum without any
provision for its indexation to offset increases in the cost-of-living. As a
consequence, the real value of the pension undergoes significant
reduction over a period of time. It is estimated that over a time frame of
7 years, the erosion in the real value (or purchasing power) of the
pension could be as high as 25%, calculated at 3.5% annual inflation
compounded.
As an example, the purchasing power of a monthly annuity (pension) of
$200 will reduce to approximately $150 by the end of the seventh year.
12
FNPF should take immediate steps to formulate an indexation scheme
to supplement increases in the cost of living. It is a necessary adjunct to
providing financial security in old age as is the object of the Fund itself.
FNPF should seriously consider expanding its range of benefits/services
into areas such as health care, home financing and insurance. Such
schemes are provided by a number of provident funds abroad enabling
their members to obtain these services on considerably advantageous
terms.
Misleading Information
FNPF statistics are misleading, designed to substantiate its premeditated
intention of drastically reducing the pension rate.
Firstly, pension annuity payment should not be equated to what the
FNPF calls Pension Income. There is no such thing as pension income –
it is contribution income.
It is a fallacy to say that annuity payments should not exceed the
amount of contribution made by a member over his working life and
that annuity payments should not be cross subsidised.
In a life time annuity scheme, the most important element is to first
strike a pension rate based on a normal working life (of 37 years in case
of retirement at age 60) which is adequate to provide financial security
to the retiree.
The next step is to determine a contribution rate which will sustain the
pension.
There is no doubt that the pension rate of 25% would be sustainable if
the contribution rate had been gradually increased from 1993 to reach
12% each by 2003. This did not happen as intended except for one
increase (from 7% to 8%) in 2000.
Secondly, FNPF continues to dodge the huge capital losses sustained by
the Fund as a result of bad investments (ATH shares, Natadola, Momi
Bay, FNPF investments Ltd, GPH etc) which is conservatively
estimated at $600 million. These investments were imposed on the
Fund by the State. FNPF should demand that these capital losses be
repaid to the Fund.
13
With the restitution of the huge sum of $600m, plus an increase in the
contribution rate over the next five years to reach 12% each, there will
be no need to reduce the rate of pension. If anything, it can be
increased gradually from the current 15% to 20% or even 25%.
Improving coverage and collections
We support the recommendation in para 77-86 of the Policy Paper
relating to the coverage of the Fund and the collection of contributions.
These are designed to cover the loopholes in the current legislation
which deprive many workers of their right to superannuation by
exploitative employers.
Governance of FNPF
We support the recommendations under this part of the Policy Paper
(paras 87-95) which aim to improve the governance of the Fund.
However, our views on the membership of the Board vary slightly from
those recommended, and are as stated below.
Appointments to the Board of FNPF
We agree that members appointed to the Board should be appropriately
qualified and that no one without the prescribed qualifications be
appointed.
However, we recommend a Board of 7, to be appointed by the Minister,
comprising two (2) representatives each of workers, employers and
government and an independent chairperson acceptable to all three
sides. The appointments of workers’ and employers’ representatives to
be made on the nominations of their most representative organisations.
It would be desirable that members nominated by the workers,
employers and government are selected from outside those
organisations to preserve their independence
