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Fiji National Provident Fund

A new Retirement
Savings Scheme

Shauna Tomkins
Stephen Mason

May 2011

Date Promontory Financial Group Australasia 1


Introduction
 Brief History
 Role of FNPF
 Key features of current Scheme
 Reviews and Analysis – World Bank &
others
 Issues, Policy Goals and Proposals

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Selected History
 Cap 219 established Fiji National Provident Fund
August 1966. Social objective - to establish self-
funded retirement savings scheme for financial
security in retirement
 Amendments since but no comprehensive review
to ensure continued relevance, best practice,
supervision – some amendments proved costly
 1975 introduced first pension product – single
premium lifetime annuity – PCR 25%/16.7%

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Brief History (cont)

 By 1992, first public warnings that pension scheme


not sustainable. ILO recommends PCR ~10%

 1998 amendment lowers PCR to 15% over 10 years

 Successive FNPF Boards loosened early withdrawal


restrictions

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Brief History (cont)

 2000-now: multiple reviews identify weaknesses


and sustainability issues
o including ILO, World Bank, IMF, FSAP, SCE, actuaries and auditors
and other commentators.

 Attempts for urgent change fail

 GFC combined with poor investment decisions


expose weaknesses

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Role of Retirement Savings in Fiji
 In many respects, FNPF incredibly successful:
 forced savings where savings tradition poor
 helped meet financial security goal

 In some respects – Too successful:


 relative size, capital markets influence, monopoly

 40% of financial sector/assets are 60% GDP


 Major domestic savings and savings mobilisation
vehicle, major player in Fiji’s economic
development

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Key Features of Current Scheme
 Self-funded Defined Contribution scheme - 8%+8%
 Some Defined Benefit Characteristics
 Guaranteed minimum crediting
 Capital Guarantee

 No meaningful preservation requirements.


 Fundamental social objective compromised through
ease of early withdrawal

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Reviews and Analysis
 As far back as 1992, warnings that the Pension
offering was unsustainable
 In 1998 following ILO recommendation to set PCR
at 10%, Board opted for 15% achieved by 2008
 Financial Sector Assessment Program 2007
(IMF/WB) recommended:
o Ensuring pensions actuarially sound
o Better diversification of assets
o Transition away from FNPF monopoly

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Reviews and Analysis (cont)
 A number identified the social problem of wealth
distribution from current members to pensioners
and from poorer to wealthier members
 Strong recommendations for splitting pension
business from the savings business

“That higher rate of pension will be subsidised by all


the younger generation who are coming in the future”
Wadan Narsay From Hansard 18 March 1998

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ISSUES, POLICY AND PROPOSALS

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1. Sound and Sustainable
Provision of Financial Products
 Current annuity contracts require substantial
transfer of earnings from current members in the
form of subsidies – this is hidden because of the
single balance sheet
 Risk management objectives of Contributions
(savings) Business and Pension (insurance) Business
in conflict on the same balance sheet
 Self funded scheme & therefore individual’s benefit
in retirement dependent on individual savings only
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1. Sound and Sustainable - Policy
 Separate savings and annuities businesses iaw best
practice
 Only provide financial products that have actuarially
assessed as sustainable
 Pension conversion rates

 Allocate appropriate reserves to meet the run-off of


current pension contracts
 Ensure “Defined Benefit” features are supported by
appropriate solvency requirements

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1. Sound and Sustainable - Proposals
 Separate activities – create at least two funds –
pension and savings
 Allocate appropriate assets

 Benefits:
 transparency,
 quarantining of assets and risk management,
 avoids cross-subsidisation

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1. Sound and Sustainable - Proposals

 Solvency requirements applied to all activities


 Actuarial assessment to support new products,
services, investment allocation or changes
 Annual financial conditions report
 Re-evaluation of all parameters and assumptions
every 3-5 years

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2. Refocus on Retirement
 ILO and others emphasise the need for the scheme
to provide replacement income in retirement – not
lump sum.
 Supported by surveys of retirees who have taken lump sum

 Only income product is Lifetime Pension


 Requires high levels of savings
 Not available to many workers

 Individual’s benefit in retirement dependent on


individual savings only. FNPF must maximise
savings through a member’s working life
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2. Refocus on Retirement –
Policies and Proposals
 Require meaningful Preservation of a majority of
contributions saved until retirement:
 Establish two accounts: Preserved and General - 70/30 allocation
 Strict limits on early withdrawals
 Potential to generate replacement income at more than 60%

 Lift limits on voluntary contributions (subject to tax


policy limitations)

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2. Refocus on Retirement –
Policies and Proposals
 Mandatory conversion of a minimum sum to
replace working income (driven by Base Pension
rate TBD)
 Minimum sum from Preserved Account only –
excess and General Account Balance can be taken
as top up, lump sum, alternative products
 New pension products – including account based
pensions and Term Annuities to provide alternative
income stream for members with lower savings
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3. Coverage, Collection and
Enforcement
 Many workers not covered by the current Scheme
 Employers avoiding the spirit of the law the alternative employment
arrangements
 Non-compliance by Employers

 No systems or powers to facilitate information


sharing between FNPF and FIRCA and ors to
improve compliance monitoring
 Inadequate powers to enforce compliance with
employers obligations including recoveries on
behalf of workers
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3. Coverage, Collection and
Enforcement – Policies & Proposals
 Ensure as many Fijian workers are covered by the
scheme by alignment of definitions and exemptions
in the Law with FIRCA
 Minimise the number of exemptions
 Implement information sharing with relevant
agencies to improve monitoring and compliance
 Comprehensive enforcement powers
 Amnesty to encourage employers to comply
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4. Governance and Reporting
 Law is silent on many aspects of Good Corporate
Governance
 RBF Policy Statement addresses only some of the
Governance Issues – fit and proper etc
 Perceived lack of independence of the Board of
FNPF and concerns over political interference
 Disclosure and reporting to members have not kept
pace with accepted practices

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4. Governance and Reporting –
Policies and Proposals
 Restructured Board
 7 members – 3 representative/4 independent
 Appointed by Minister – iaw transparent nomination
process
 Emphasis on experience and skills mix for the Board
 Fit and proper person requirement including Codes
of Conduct
 Enhanced disclosure in annual reports and to
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5. Other issues
 Education role particularly retirement planning
 Practical difficulties on divorce will be addressed
 Continued appropriateness of 55yo as entitlement
age
 Appropriateness of 8% + 8% mandated contribution
 Alternative product development and
De-monopolisation
 Financial Services Ombudsman

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Summary
 Proposals to ensure the financial sustainability
include actuarially assessed provision of benefits
such as pensions, separation of funds, solvency
reserves, stronger governance
 Improved transparency through separation of funds,
financial conditions reports, appointment of boards,
reporting to members
 Ensuring Fiji’s retirement savings scheme is fair
through coverage of workers, removal of cross-
subsidisation, better products and refocus on
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Q&A

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