Dionisia Tabureguci FIJI BUSINESS STORY JUNE 2011
Over 10,000 pensioners in Fiji will soon feel the pinch of hip-pocket nerve changes being proposed by the Fiji National Provident Fund (FNPF).
To be exact, 10,836 people. That’s the number of pensioners in FNPF, according to data released last month by the fund as part of its public awareness campaign for the necessary overhaul of its pension scheme.
All of them are getting an annual pension income of between 11 percent and 25 percent of their account balance upon reaching 55 years old, with most on a take home packet of 16.7 percent and 25 percent annually. These figures will soon drop to somewhere below 10 percent, as the FNPF and government spearhead a move, they say, will save the fund from exhausting itself on high pension payouts alone.
“The proposed changes will refocus the fund to its core objective—providing financial security to its members during retirement,” the FNPF says in one of its information brochures.
Fiji’s headway in this direction is simply blending in with the crowd, as pensioners and pension funds even in developed economies are undergoing some transformation.
Unlike in the Americas and Europe where pension reforms are spiking public anger and union-led protests, Fiji’s execution is expected to be swift and easy, as the country is under public emergency rule, forbidding any form of public protest.
Throughout last month, the FNPF team, led by its chief executive officer Aisake Taito, ran a series of public consultations on the 12 areas of reforms on the fund’s agenda.
Of these, two key components put forward were the review of the FNPF Act and the Pension Scheme, based mainly on an independent evaluation carried out last year by international financial consultancy firm, Mercer.
Mercer had found FNPF to be well within its means to support current liabilities and still retain a surplus of $55.8 million. But it risks running aground by 2056 from “the generous and unsustainable rates at which savings are converted to pension income”.
Mercer is advising huge cuts in pension rates if the fund wants to survive, although there is a mercy clause for the vulnerable members—those with very low account balances.
They will be exempt in both the adjustment scenarios being considered by FNPF.
No doubt though, most existing pensioners will be biting the bullet as this reduction boils down to one thing—they are going to get less in pension income from FNPF.
Ticking time bomb
On the other hand, FNPF has virtually been bleeding money for pensioners in a cross-subsidisation arrangement that sees the current contributors largely footing its pension bill.
For example, a pension rate of 25 percent paid out to a pensioner with $100,000 in his account upon retirement means the FNPF pays him $25,000 a year.
In theory, if he lived only up to four years after retirement and then died, he would have been paid the $100,000 in full.
The reality that the FNPF has had to grapple with over the years is that most pensioners do not die within four years after their retirement.
In fact, demographic data for Fiji reveals a population that lives longer. The FNPF is using the World Health Organisation (WHO) Life Tables 2008 because, according to Taito, it provides more recent figures than what’s available at the Fiji Islands Bureau of Statistics.
The WHO statistics show that males in Fiji tend to live an average of 18.9 more years after they’ve turned 55, while females tend to live longer, at an average of 22.6 years.
On the assumption that members who do reach FNPF’s retirement age follow that trend, the FNPF is obliged to pay them 25 percent a year for as long as they live.
In the case of our pensioner, if he did survive the next 18 years after retirement, FNPF would have to pay him a total of $450,000 over that 18 years.
It’s a ticking time bomb simply because it translates to free money for the pensioner and a heavy burden for the pension fund.
“The major issue is that the pension income (the amount left by pensioners in the fund when they retire) is less than the payment made to them,” said Taito in last month’s public meeting.
“The total pension income at the end of June 30, 2010 is $290 million and the amount paid totalled $423 million. The fund’s future payments to these pensioners will have accumulated to $986 million.
“The ‘negative’ balance of payment (income minus payments) is $702 million. This is the fund’s pension obligation. The difference in income and payment each year continues to widen (See table on page 5).
“If not addressed, it will lead to serious consequences for the fund. Not only are some pensioners receiving 10 times more than what they left with the fund—the difference is being subsidised by current members—all current members are contributing to these payments,” Taito added.
What the FNPF pension reform wants to achieve now is to introduce changes that would spread the retiree’s balance over the course of this future life expectancy without putting undue stress on the fund and its contributors, hence the proposed reduction in pension rates.
“The problem with past and existing rates applied over the years by the fund is that they were not actuarially based,” said Taito.
“It did not take into account demographic changes like life expectancy, gender, and the changes in the financial investment market. For example, the pension rate of 25 percent offered by the fund prior to 1998 assumed that retiring members live on average less than five years after they retire. This means they would use up all their income in four years. Who pays from the fifth year?”
This is where the subsidisation is occurring. “Current workers have to pay what is commonly referred to as subsidisation,” said Taito.
“Initially through direct subsidisation until 1998 (through the pension buffer reserve) where two cents of members’ contribution were credited to reserves to support the pension payments.
“From 1998, current members have been cross-subsidising through lower credit rating to ensure adequate reserves for pension payments are available. Put simply, it means money that could have been distributed to members as interest earned was instead paid to pensioners.
“This is not sustainable and the challenge is—how do we meet existing obligations and implement a pension scheme that is sustainable and fair in the future?” said Taito.
The discussions surrounding FNPF’s high pension rates are not new. The result of previous actuarial studies were what led to the gradual trimming of the 25 percent (for single life pensioners) and 16.7 percent (for joint life pensioners) in the first place.
Since 1998, both figures have been gradually slashed by one percent each year to what is now 15 percent for single life pensioners and 11 percent for joint life pensioners.
As way back as 2002 after another actuarial review by the International Labour Organisation, those final rates were still considered too high.
“The ultimate rates set in the current annuity factor reduction schedule (15 percent for single-life pensions and 11 percent for joint-life pensions) are still too high to ensure the long-term sustainability of the FNPF pensions scheme,” the ILO wrote in its summary of that report, available on its website.
“A simple calculation implies that for every one dollar converted into annuity, the annuity factors of 25 percent, 20 percent and 15 percent would respectively produce F$3, F$2 and F$1 additional liability to FNPF.
“Under the current mortality level, the actuarial annuity factors are estimated as 10 percent for single -life pensions and 8 percent for joint-life pensions assuming the fund achieves the rate of return of at least 7 percent per annum. These factors will be lower if the fund cannot ensure a 7 percent rate of return.”
The general consensus is that FNPF must retrofit its foundations—trim as a non-negotiable necessity or crumble and take the country’s economy down with it.
This move therefore by the current management to do this is being recognised as a necessary evil, because FNPF, with its massive size and an asset base equivalent to 60 percent of Fiji’s Gross Domestic Product, must not be allowed to collapse. If it did, Fiji’s economy would simply vanish.
But there are still concerns that the current reforms are taking place in a difficult local environment, where the restraint on public views have stifled the genuine voicing of issues regarding governance, transparency and accountability, as well as an honest assessment of the impact of government intervention and heavy reliance on the fund.
This strongly came out in an opinion piece released last month by academic Dr Wadan Narsey.
Mismanagement and bad investments
He viewed the pension reform as being driven more by the need to save it from the toll of mismanagement and the multitude of bad investments that have cost the fund millions of dollars than the urgency to lower pension rates.
“For several years now, there have been studies done by IMF, World Bank, ILO, etc, that have argued that FNPF could not sustain the 15 percent single pension rate over the long-term. And given the long-term declining performance of the FNPF investments, the 15 percent pension rate may have been a little on the high side,” said Narsey.
“But we don’t know why. For every FNPF management team and board for the last 15 years have arrogantly refused to make these studies public. The public will never know whether the data and the analysis are accurate, and whether the recommendations are justified.
“But they should know two reasons why the pension rates are being recommended to go down as low as 9 percent: first, the economic stagnation over the last four years directly caused by the 2006 coup; and second, FNPF’s disastrous investments and board decisions during the last four years.”
Members of the fund, he believes, are being forced-fed the changes with very little ability to resist them if they want.