FNPF reforms misdirected

  • 27th May 2011
  • 2011
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No need to cut pensions, says Labour

(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%.

Herewith the (revised) FLP submission in full:

Fiji Labour Party

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.


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.

Mahendra Chaudhry
Leader/Secretary General