What pensioners can expect under the new scheme

By Dionisia Tabureguci

February 2013

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Fiji
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A mere $5 a month from the Fiji National Provident Fund (FNPF) as pension annuity payout for some of its members is almost a joke. But this has long been the harsh reality for the nation’s only superannuation fund that caters for the country’s working population.

Some of its members were getting as low as $5 a month as pension, a paltry sum that no one can survive on these days. 

The shocking revelation surfaced during a series of members’ forum the FNPF has been running to inform members of its new pension scheme, which came into force in March last year.

The new scheme has replaced an old one, labelled as “unsustainable” by the fund’s management because it was paying out one of the world’s highest annuities as percentage of a member’s balance at retirement.

In the new scheme, the changes mean that FNPF’s pension offerings are more market-based and stories like $5 a month pension as a thing of the past.
Getting there though has been tough.

Initial resistance

When FNPF proposed in 2011 to cut existing pension rate—to slash to below 10 percent the prevailing rates of 15 percent for sole pension and 11 percent for joint pension—it was not taken well by its members and quickly became a hot potato.

Many feared the difficulties of having to adjust to reduced pension income, given important personal expenses like mortgages and loans commitments to pay off on top of the rising cost of living.

The FNPF’s decision to even institute the pension reforms was heavily criticised, although it was a necessity recommended by a number of actuarial studies done previously to save it from bankrupting itself from pension payout alone.

Some were outraged that they were being guilt-tripped over their comfortable pension income when some members were getting as low as $5 a month.

“How can a pension possibly be ‘over-generous’? By what yardstick? Whose yardstick? FNPF pensions are not a gift from the big benevolent FNPF. Those pensions are an entitlement—a return on investment,” wrote local critic Sue Cauty in an open letter to the FNPF board which was posted on fijipensioners.com on December 3, 2011.

“One would think that a board managing an investment pension scheme would be able to understand that. On the other hand, that lack of understanding is the reason for the problem in the first place. The bottom line is simply that those on higher pensions paid bigger personal contributions, which in turn required the employers to pay larger contributions, resulting in higher pensions,” said Cauty.

Attempts by pensioners to seek redress in mid-2011 through legal means was quickly shot down by the Fiji courts and it is still an unresolved issue, much to the chagrin of those who have filed the case.

Unplanned retirement

But the fact that a number of FNPF members are getting as low as $5 a month exposed the gravity of the general inability by some FNPF members to save money for their retirement, either because they have withdrawn their savings on the various grounds of partial withdrawal, leaving less for pension, or they earn meagre wages or both.  

While the fund was criticised for proposing steep cuts for the top pension earners who had planned their retirement lifestyle around the expected pension income and would therefore find the changes more disruptive, it was also frowned upon for mooting changes that spared little thought for those at the pension’s bottom rung. 

“These pensioners are not the sole beneficiaries of their pension,” wrote Cauty. “Rare indeed is the pensioner who has only himself or herself to care for. And the FNPF has no idea of their circumstances, no idea of their debts and medical needs. You [FNPF] should have, and could have asked, and this furore (over pension cuts) would have been averted. Of course, you could not have taken every single pensioner’s plight to heart. But you could have shown a human face. A caring, thoughtful, fair and just remedy could have been and can still be found.”

What was especially frustrating for the critics was the perceived moral high ground taken by FNPF, where it made seemingly unilateral decisions on the rate cuts, yet made investment decisions that members found questionable. 

The reported $200 million loan in 2011 to the national airline Air Pacific—soon to be named Fiji Airways—was one that stirred a lot of controversy, as it was seen as highly risky, given that the airline was struggling. 

As well, FNPF’s foray into the hotel sector in the past had left it badly burnt and it appeared the fund hadn’t learnt any lesson from it.

It has been linked in the past to popular hotel names as Tradewinds, Sheraton, Naviti and the Travelodge (now Holiday Inn) hotels, as well as a number of bad loans written off during the tryst.

The previous board and management under ousted Olota Rokovunisei had spearheaded moves to increase the fund’s exposure to the growing tourism sector by pushing for legislation that allowed the fund to take equity ownership in tourist-related projects. In the past, it was only limited to giving loans.

No sooner had the Rokovunisei management launched its equity partnerships in the sector—adding names like Momi Bay Resort, InterContinental Fiji Golf Resort [HTML_REMOVED] Spa (Natadola Bay Resort Ltd) and the iconic Grand Pacific Hotel to FNPF’s equity portfolio—problems in some of these investments set in and they are now costing the fund millions of dollars to fix.

The expulsion by the Voreqe Bainimarama government of that board and management and the subsequent appointment of the current board and management under CEO Aisake Taito, a former deputy secretary at the Ministry of Finance, led some critics to believe that FNPF’s already troubled investments will worsen rather than improve. 

Their views were restricted locally because of media censorship but their concerns found their way to online social networking sites, overseas media and blogs. 

These concerns zeroed in on the soundness of FNPF’s investment decisions, given its board had been allowed a free rein in an environment where any criticism over its activities was viewed as negative and was ignored.

Critics, who were also FNPF members, had quickly linked the pension rate reduction more to foolish investment decisions than to the fund’s ability or inability to sustain pension payouts.

New scheme

FNPF, on the other hand, maintained its stand that the sustainability of the existing pension regime was impossible. It pushed ahead with its reform that did award the lower pension bracket with a mandatory $100 a month pension. 

Operational from March last year, this new pension scheme offered pensioners options to either stay with the fund upon retirement or take all their money and leave. 

For those who choose to stay, two options are given. An age-base life pension available as single and joint pension; and the term annuity option, where a pensioner is paid a regular monthly payment for a fixed term, either five, 10 or 15 years. 

The term annuity rates are much higher—21percent for the five-year plan; 12 percent for the 10-year term; and nine percent for 15 years.

For those who choose the age-based life pension, the interest rates increase with age, so a retiree choosing the single pension option at 55 years old will receive an annuity based on 8.7 percent of his or her pensionable amount, while a retiree choosing to exercise his or her pension right at 60 years old as a single pensioner will enjoy a rate of 9.6 percent. 

When choosing one of the two main options, a pensioner is given the flexibility of taking out a portion of his or her money and reinvesting some with FNPF as pension.

This flexibility has in turn given an FNPF pensioner at least 11 options: sole life pension; joint life pension; part sole life pension part joint life pension; part lump sum, part sole life pension; part lump sum, part joint life pension; part lump sum, part sole life pension, part joint life pension; full lump sum; term annuity for five years, 10 years or 15 years; part lump sum, part term annuity; part lump sum, part life pension, part term annuity.

To mitigate the impact of reduced rates for existing pensioners in this initial stage, a “top-up” concept has been introduced, where the FNPF pays a pensioner any shortfall between what the member was getting in the old pension regime and the new one.

A pensioner could only qualify for this if he or she left all monies with the fund.

This new pension offering appeared to have gone down well with existing pensioners when it came into effect and initial fears over eroded income were somewhat calmed.  Most chose to leave all or some of their monies with FNPF.

“Of the 10,113 validated pensioners, 6,875 opted to reinvest $168 million into the fund’s new scheme, whilst 3,223 pensioners exited through lump sum withdrawals,” Taito reported in the FNPF’s 2012 annual report.

“The fund had set aside $57 million for top-ups. For those who qualified for this, 1,450 received a higher monthly pension capped at $100 per month, 2,820 continued to receive the same monthly pension as in the old scheme and only 15 pensioners suffered a reduction in pension by more than 50 percent,” Taito added.

As new pensioners exercise their options this year and beyond, they would be doing so under the new reduced rates, which will see them with considerably lower pension income than what current pensioners are getting.  

Frustration at FNPF’s huge loans

FNPF’s pension reform covers a wider scope of changes than just the adjusted rates.

But if this reform is to be seen as putting the brakes on a calculated decline in the fund’s sustainability, its critics believe more work is needed to address its long-term sustainability.

An area that has received a lot of attention is FNPF’s investments where it is believed more prudence should be exercised to lessen the considerable waste of members’ funds mismanaged though questionable investments made over the years.

FNPF’s inability to properly diversify its investment funds in the local economy and offshore markets is a well-known problem as the local economy offers it limited opportunities while its interest in offshore investment is subject to the Reserve Bank of Fiji's approval, typically pegged on the country’s foreign reserves exchange status.

Being the biggest local financial institution, with over $3 billion in assets under its management, FNPF is equivalent to a big fish in a pond and diversification is crucial to its health.

But relentless criticisms have been levelled against how this has been handled of late.

“Two recent media releases indicate that the FNPF Board and Management are digging the hole deeper for FNPF, with no accountability to the owners of FNPF, and media censorship stopping all public discussions,” wrote critic Dr Wadan Narsey on coupfourandahalf.com in October 2011.

“The first is the bad restructuring of the $303 million loan by FNPF to Natadola Bay Resort Limited (NBRL); and the second is the massively risky $200-million loan to help Air Pacific buy three Airbuses in 2013, completely contradicting the most recent advice by recent consultants (Promontory) on sound investment policy for FNPF.”

Air Pacific loan

The Air Pacific loan especially attracted so much attention as the Fund’s $200-million loan was to be used by the airline as collateral to attract financing from Europe, where the airline was prospecting for the F$1 billion loan it needed to purchase its new airbus planes.

This was labelled as “terrible business practice for FNPF” by Narsey, whose opinion was published on coupfourandahalf.com immediately after the official announcement by Air Pacific.

“It should be the other way round: if they were to give a loan at all, FNPF should wait until the private commercial lending agencies, who are financially far more astute in lending to airlines than FNPF management and board, have put up their $800 million, on which the FNPF could then piggy-back with $200 million. For FNPF to fork out the initial $200 million as deposit or collateral, would suggest that the European credit companies were not prepared to trust Air Pacific’s own financial projections on the viability of their billion-dollar purchase,” Narsey said.

FNPF, however, could only explain it was bound by confidentially clauses that prevented it from revealing any detail, despite rumours widely circulating on the terms of the loan. One report even suggested that the loan was given at an interest rate of one percent per annum.

“The loan arrangement with Air Pacific was negotiated under strict and prudent commercial terms and in the best interest of members,” FNPF told FIJI BUSINESS in an email interview. 

“Like any other commercial agreement, the disclosure of information is bound by the terms and conditions of such arrangements. Nevertheless, the required disclosures are contained in the FNPF Financial statements for 2012, in accordance with the International Financial Reporting Standards.”

In the 2012 annual report, FNPF disclosed the loans provided to Air Pacific during the year totalled $145,697,239 and are for 15 years at an interest rate of 8.75 percent per annum.

“The loans have been provided for the acquisition of aircraft by APL (Air Pacific) and the principal repayments (amounts to be determined—FNPF’s note) will commence upon the delivery of the aircraft to Air Pacific on March 2013, May 2013 and November 2013.”

The loans, according to FNPF’s disclosure statement, are principally secured by a first ranking aircraft mortgage in respect of each mortgaged aircraft, an assignment of the insurance proceeds over each mortgaged aircraft, a first ranking security over the borrower’s shares in Richmond Limited, security from the Fiji Government.

When this edition went to press, Air Pacific has yet to announce any progress in its effort to get finance from European investment banks, which it revealed it was in talks with. However, the only announcement made, was that Air Pacific's CEO David Pflieger (Jnr) was returning to the United States after he completes his term in May 1, 2013.

Natadola loan

Another high profile loan under the radar is the $300 million loan to Natadola Bay Resorts Ltd (NBRL), an FNPF subsidiary that owns the Intercontinental Fiji Golf Resort [HTML_REMOVED] Spa in Nadi. FNPF had been having trouble with this project even before it started and it later took over the property from the dubious developers and sought to rehabilitate the “largely unsecured” loan. To-date, not a single cent has been paid.

Even though FNPF had come up with a proposal in 2011 to restructure the loan, it still hadn’t by the end of the 2012 financial year—which was June 2012—executed the loans agreement.

It had restructured the NBRL loan into three parts: $60 million to be paid over 26 years at an annual interest rate of 8 percent; $40 million to be paid over 26.5 years at 8 percent interest per annum; while $203 million is to be interest free and to be paid over an indefinite term. 

It angers critics to see FNPF making these sorts of business decisions while it maintained a tight leash on its pensioners. The wasted funds, they believe could have very well gone towards the pensioners’ welfare.

“FNPF, will effectively in its accounts, give a $16 million subsidy annually to NBRL—some 40 percent of the total value of all the pensions currently being paid annually,” wrote Narsey in his critique on the decision.

“This is terrible accounting practice for three reasons. First, any decent accountant or economist would advise that all transactions between a parent company and a subsidiary should be done at “arms-length” with subsidiaries being charged the same interest rate that other borrowers are being charged. To convert $203 million into an interest free loan will artificially increase the apparent profitability of the subsidiary (NBRL), while reducing the apparent performance of the rest of FNPF.

“Second, by not charging interest on the large loan, NBRL is being given no incentive to repay the loan as soon as possible—especially when it is ‘indefinite’.

Third, if in future, this [government’s] forced takeover of private assets at Natadola and vested in NBRL by Military Decree is legally and successfully challenged, then the assets of NBRL will become logical targets for litigants,” Narsey said.

“The books for NBRL should therefore show its true worth- not artificially inflated through interest rate subsidies given by FNPF, which may then be claimed in future by legitimate litigants.

“Which financial institution in the world, gives an interest-free indefinite loan like this? Who dreamt up this scheme? Who in FNPF management agreed to go along with this? Why would the unelected, illegal FNPF Board Members agree to this subterfuge to show the NBRL in a better light? Is it to allow more “write-backs” on asset value of this bad investment?”

Discussions on pension, not investments

FNPF for its part has often found it tricky to discuss its investment decisions with its members and although it has been on the road evangelising its new pension scheme, it has steered clear of inquiries to do with its investments, especially in troubled projects. 

But in a “myths and realities” flyer it released to members on the pension reform, it did agree that more accountability and transparency in decision-making was needed. And it disagreed with the views that it was because of bad investments that pensioners had to endure the rate cuts that are now in place.

“The pension scheme was flawed fundamentally regardless of past investment decisions and write-downs. Even at the lower conversion rate of 15 percent in 2002, the ILO (International Labour Organisation) pointed out that technical provisions to support such annuities are $2 for every $1 converted. That is, the day FNPF accepts $10,000 in savings to be converted to a life annuity at 15 percent, it must set aside $20,000 to support those future payments. The extra $10,000 must come from assets supporting member liabilities,” FNPF said.

“Therefore the Natadola Bay losses and under performance of a minority of assets has not contributed to the pension problem. In any case, it has been members who have borne the brunt of any poor investment performance through lower crediting rates. The investment issues do highlight why the need for other reforms relating to decision making, board responsibility, transparency and accountability, board independence and risk management are so important.”


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