Moves to reduce the rate of pension

[24 June 2009,12.00]

Labour Leader Mahendra Chaudhry has called on the interim government to explore better alternatives to sustain the financial viability of the Fiji National Provident Fund rather than reducing the current rate of pension to its members.

He was commenting on recent statements by FNPF chairman Pramesh Chand that FNPF may have to lower the rate of annual pension from the current 15% of a members’ total contribution to sustain the Fund’s viability.

“The move is unwarranted and ill-advised and seems to be based on a total lack of understanding of the concept behind a provident fund,” says Mr Chaudhry.

“The underlying concept behind a pension scheme is to ensure that workers who have spent 30 to 40 years of their life in productive economic activity can retire with dignity and have a liveable income in their old age,” he said.

In a country such as Fiji where there is no social security net except the pension scheme operated through the Provident Fund, pensions have to be adequate to ensure workers a reasonable standard of living in retirement.

Mr Chaudhry says questionable investments made over a period of time are now threatening the viability of the Fund. Huge amounts spent on major tourism development projects like the Momi Bay, GPH and Natadola resorts and in real estate and business ventures through its venture capital arm, have resulted in major losses.

“It is conservatively estimated that currently over $500 million of the Fund’s investments are not providing any returns. This has resulted in a lowering of the interest rate on members’ savings and has contributed significantly to the current solvency crisis facing the Fund,” Mr Chaudhry said.

The answer to ensuring the viability of the Fund well into the future lies not in reducing the present level of pension but in raising the rate of contribution. FNPF needs to raise member/employer contribution from the current 8% in the dollar to 12.5%.

“The increase can be achieved progressively over a period of 5 years thus ultimately ensuring a savings rate of 25% of the wage/salary of the employee. This should provide sufficient revenue to not only maintain the pension at the existing rate, but to increase it to 20-25% gradually.

“An increase in the contribution rate has been long overdue. The Fund was established in August 1966 with a contribution rate of 6%. This was raised to 8% in 1978 and has so remained for the past 31 years,” said Mr Chaudhry.

FLP had raised this matter in Parliament when a reduction in pension rates was initially mooted. Subsequently, in the course of the 1999 review of the Fund our position was to increase the contribution rate and not reduce pensions.

“It seems there are bureaucrats out there who are obsessed with cutting everything under the guise of so-called ‘reforms’. Such people at the helm of our nation will simply make the lives of our ordinary workers utterly miserable and aggravate the social divide,” he said.

Mr Chaudhry said wage rates in Fiji were pathetically low. An ordinary worker will thus not be able to retire with a reasonable pension based on a measly contribution of 8% of his low wages. Another factor to be considered is that FNPF pension is not indexed to cushion increases in the cost of living. It is a fixed life-time pension without any supplementation.

These important considerations must be understood and appreciated by people who have been put in charge of administering the Fund.