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FNPF reform proposals misdirected:
No need to cut pensions, says Labour
[posted 27 May 2010,1700]
(Revised Paper)
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%.
FLP submission follows in full:
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).
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?
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:
• 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?
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.
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
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.
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.
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 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.
MahendraChaudhry
Leader/Secretary General |