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%.

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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