Key points on Meeting between Tevita Nagataleka and Christopher Jackson MarHeld at Sheraton Fiji Resort on 04 February, 2012 from 10:00 to 11:30 am.

Tevita Nagataleka
I have been very impressed with your extensive research and the information that you have provided me. This is the reason that I decided to meet with you.

Jackson Mar
I would also like to show my appreciation for your efforts in meeting with me. One of the great frustrations of pensioners is that neither FNPF decision making executives nor government ministers are willing to meet pensioners to exchange views in a meaningful, professional and constructive way..

Impact resulting from reduction in pension. I would like to outline my life experience so that you can understand my position. I started earning an income at the tender age of 12. I have only a high school education but have participated in ongoing executive management development programs including a six-week executive management development program at theUniversityofHawaii.. My career spans from being a bank clerk, airline accountant, senior executive management positions in the hotel industry including company secretary, financial controller, resort manager, owners’ representative and chief executive officer. The companies include Fiji Resorts Limited (owning company for Shangri-la Fiji Resort), Four Seas Regent Resort, Raratongan Beach Resort, Sheraton Denarau Villas, Richmond Limited (owners of Sofitel Fiji Resort). I was also a past director of Denarau Corporation Limited for three years.

It took years to plan my retirement finances and every dollar saved with the FNPF was entrusted to the Fund for a contracted life time pension. Now at age nearing 69 years, my pension (if I decide to accept one again) would be reduced by more than half.

In my advanced age, it would create an untenable financial blow resulting in a substantial reduction in my living standard, dependence on our children and eventual sale of our home in order to make ends meet.

As you grow older many expenses increase e.g. medication, dietary requirements, tertiary medical, old age care, inflation (pension is not subject to inflation adjustment as with Fiji government pensions) etc.

It would also have a very negative psychological impact on me, and many pensioners are in a similar cruel predicament.

TN
There is a need to understand the underlying principles of the reform i.e. sustainable, non-discriminatory and no cross subsidy. 

Sustainability and FNPF’s capacity to pay pensions are dependent on returns on investment, life expectancy and pension take up rate. 

Initially the take up rate was very low and FNPF encouraged and promoted members to take up pensions. 

Many countries are also reducing pension rates and pensioners need to face reductions. Pensioners have received large payments many times what have been paid for annuities and the offer to pensioners is fair.

JM
The improvement in take up rate was a double edged sword. While more members were benefiting by taking a pension, it also affected the viability of the pension scheme especially when the 2c contribution was stopped

You refer to pension reduction in some countries. It should be noted that these are mainly non-contributory pension funded out of government revenue of these countries. FNPF is a contributory pension scheme funded by members and employers without government funding. Such reference is not appropriate.

All pensioners have received many times what they have paid for in annuities – all receiving the same pension rates as was originally intended by the designers of the pension scheme and also by the FNPF Act..

It seems that those that have been frugal and saved wisely are being singled out, pensions reduced and vilified. This is discriminatory and contrary to the underlying intensions of the reform.

By refunding to pensioners their original amount given to FNPF for the purchase of annuities is breach of contract. By legislation this change by Decree puts government in a bad predicament where it is required to legislate retrospectively. Such retrospective legislation is considered unjust legislation used only in very dire circumstances e.g. war and national emergencies.

(Not discussed at the meeting but very relevant:

  1. Such breach of contract and retrospective legislation to effect such a breach would send very negative signals to potential investors as they worry that their investments contracts may also be breached in a similar manner.
  2. Eligibility age for pensions. It is presently 55 but many countries have 65 years and over. This is the first mechanism used by most countries prior to reduction in pension rates. As FNPF states that life expectancy is increasing, it would be more appropriate to increase the eligibility age gradually thus reducing or minimizing the requirement to reduce the pension rate).

TN
The take up rate is now at a low – 14%.

JM
I suggest that this is due to a lack of confidence in your organization. People are afraid that new pension rates on offer may be cut again in the future.

TN
Rate of return has been declining – some investments had very low returns (some none) including hotel investments. There are some bad investments. Investment opportunities were limited inFijibut working with government to invest overseas.

JM
In the current negative global climate, there is a danger in overseas investments. Return on investments in Government instruments were also low e.g. short term borrowings – government preferring short term low interest loans from FNPF (FNPF has little viable options). With Reserve Bank having supervisory oversight of FNPF, setting government bond rates and controlling overseas investments, is there a conflict of interest?.

Hotel investments were long term investments and not necessarily bad investments. Returns are generally medium to long term (Denarau is a very good example). 

As FNPF now has title to Momi land, it should be in a position to write back part of the amount written off thus increasing its net asset value. 

FNPF must proceed and complete the development of both Momi and Natadola to realize both hotel and residential/hotel land sales incomes. 

The Momi physical assets are deteriorating – the incomplete Cook Islands Sheraton resort project is a good example of what would happens to your investment when you do not proceed and complete development – it will no longer be an asset but a liability.

TN
FNPF will proceed with Momi development.

JM.
When you speak of sustainability, it is about long term sustainability. World Bank, ILO and consultants also refer to long term sustainability. In the short term FNPF can sustain payment of pensions to contracted pensioners.

I put it to you that none of World Bank, ILO and consultants’ reports has recommended reduction to contracted pensions. In fact ILO 2002 report states that in assessing the sustainability of the further pension rate reductions, quote “it is crucial to estimate the costs associated with the transitionally high annuity factors …..” (This refers to contracted pensioners’ pension rate). The ILO is stating that FNPF must continue to honor the contracted pension rates – no reduction!

Both the Decree 51 and FNPF state pensions cannot be met from Annuitant’s conversion amounts (contribution from pensioners on their retirement) plus return on investments/ interest. Mr. Taito has also been reported to have said the same thing in the media.

Contrary to the above, the FNPF Annual Report has not shown any payment of return of investments and or interest to the Pension Buffer Reserve from 1975 to 2011.

The calculations of the Pension Buffer Reserve in my spreadsheet including returns on investments/interest show that FNPF has the capacity to honor its contract pensioners.

The FNPF 2011 Annual Report also indicates that the FNPF has sufficient net assets to meet liabilities to members and pensioners.

TN
Pension Buffer Reserve has no legal basis.

JM
I agree that the Act does not refer to Pension Buffer Reserve.

If it has no legal basis please explain why it is shown in the FNPF Audited Financial Statements that form a part of the Annual Report?

Most disclosures in the financial section of the Annual Report are not mandated by the FNPF Act. Does this mean that all these inclusions (not mandated by the Act) in the annual statements have no legal basis also?

I suggest that it is a financial accounting requirement. Companies use departmental accounting. The pension scheme is like a department and all its income and expenses should be accounted for in the departmental report. The Pension Buffer Reserve in the Annual Report attempts to disclose the Pension Reserve separately from General Reserves. The only and main problem is that it has neglected to include return on investments/interest that both Mr. Taito and Decree 51 state are accounted for..

The term “Pension Buffer Reserve” may not be appropriate. Perhaps it should have been called “Pensioners Account” (similar to members account).

TN
Without the two cents contribution the payment of pensions to contracted pensioners would not be sustainable.

 

JM
You cannot eliminate the two cents contribution totaling $298.384m from the sustainability calculation because the FNPF Act states that the two cents contribution is intended “for the purpose of financing the payment of annuities”.

Perhaps we should determine what proportion belongs to current members who have contributed their two cents to the pension fund from 1975 onwards till 2011 but have not retired yet.

After deducting current members’ entitlement, the remaining balance from the $298.384m remains “for the purpose of financing the payment of annuities”. FNPF can access records to determine the amount.

After estimating a ratio of pensioners’ entitlement, I will re-work the spreadsheet. I am confident that there will be sufficient funds in the Pensioners’ account (Pensioners Buffer Reserve) to pay contracted pensioners till they all die. I will send you the revised spreadsheet.

(Subsequent to the meeting, my revised calculations of the Pension Buffer Reserve incorporating:

  • interest on investments at rates similar to that paid to members and
  • only 70% of the $298.384m collected from the two cents deducted from members’ contributions for the purpose of financing the payment of pensions

The spreadsheet shows that there is more that sufficient funds to support the continued payments to contracted pensions. At the end of the life expectancy of all contracted pensioners, there would be a surplus of $811.33m that would accrue to the benefit of members (based on a very low return on investment of 5.5%).

The meeting concluded with both parties expressing their appreciation for the candor, cordiality and frank views and information exchanged.

Not discussed at the meeting

  1. I would like to raise a very important point. The sequestering of $150m from pensioners to support the Board to meet member liabilities and new solvency requirements (out of the technical provision quote from the two FNPF consultants: “to be set aside to support future pension payments of all current at that date was $565m”).

Why are pensioners only responsible for these two requirements i.e. to meet members’ liabilities and new solvency requirements? Current members should also share in these shortfalls (if they do exist) especially when members’ liability for accrued benefits is 85% of total liabilities for accrued benefits. Pensioner’s liability is only 15% (2010 Annual Report). If proved necessary, pensioners should only contribute 15% of $150m or only $22.5m. The balance of $127.5m should remain for the benefit of contracted pensioners other wise, pensioners will be cross subsidizing members contrary to FNPF’s underlying principles of the reform. This would result in minimal reduction in the pension rates.

  1. I cannot understand the need for sequestering $150m from pensioners. I note the following from the 2011 Annual Report.
    1. Liability for Accrued Benefits                                                            $2,997m
    2. Net assets required to meet Liability for Accrued Benefits               $3,768m

I am not sure if pensioners’ liability of $565m is included in the above $2,997 but, even if it were excluded, there is still more than sufficient net assets to cover payment of contracted pensions.

The above indicates that there are sufficient net assets to meet liabilities to both members and pensioners. Therefore there is no need for a reduction.

Summary of Main Point Raised in mt Letter and addressed in our meeting.

  1. Return on Investment and or interest have not been paid to pensioners’ account (Pension Buffer Reserve).
  1. If paid, there would be sufficient fund to pay contracted pensioners till they all die.
  1. All, if not most, of the 2 cents contribution totaling $298.384m are intended “for the purpose of financing the payment of annuities”. (As you say, 84% of retirees do not take a pension and do not benefit from the 2 cent contribution – nor do those who withdraw to migrate, take lump sum withdrawals, business loans etc). The FNPF Act excludes them from benefiting from this 2 cent contribution.
  1. The sequestering of $150m from pensioners “to meet member liabilities and new solvency requirements” has no legal basis and cannot be justified. If this were not done, the requirement for pension rate reduction for contracted pensioners would not be necessary. 

Prepared by Christopher Jackson Mar.
16 February, 2012.