FNPF reform proposals misdirected:
No need to cut pensions, says Labour
[posted 26 May 2011,1630]
The Fiji Labour Party says the long term
viability of the FNPF can be maintained without making cuts to the current
rates of pension benefits.
In a submission to the FNPF on its
proposal to cut pension rates down to 9%, Labour said the move was
iniquitous and a gross injustice to the workers of Fiji who had contributed
for years in the expectation that they would receive adequate pension to be
able to retire and live in dignity in their old age.
The submission proposes a number of viable
alternatives which the Fund could adopt instead of drastically reducing the
current rates of annuity to 9%.
The FLP submission follows in full:
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).
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%.
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?
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
$600m 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.
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.
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%
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 will 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.
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 for lower paid workers
(members) be fixed at 6.5% (minimum) with those in the upper middle and
upper levels receiving a return of 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 Fund's 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.
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.
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.
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.
Improving coverage and collections
We support the recommendations 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 (para 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 stated as 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 qualification
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.
M.P.Chaudhry
Leader/Secretary General |