Capital markets may cushion pension shortfall

Dionisia Tabureguci

All future pensioners seriously looking forward to a financially secure retirement have been cautioned about one thing: not to bank all their hopes on just their pension income from the Fiji National Provident Fund.

Those brave enough to face the reality of this fund will know it faces investment challenges. A huge chunk of the members' funds is tied up in government securities.

Its equity participation ability is so limited that its 2002 portfolio showed a mere 17.95 percent exposure to equities. Of that, 93 percent is tied up in one entity-Amalgamated Telecom Holdings Limited.

Then in 2003, the Reserve Bank of Fiji put in place a conservative policy disallowing it from investing offshore where the markets are efficient and money could really be made to work.

All these add up to an overall lower return for the fund, which means less money coming in and therefore the need for the fund to be more prudent when disbursing benefits.

FNPF's decision to progressively cut pension rates to 15 percent by 2009 is itself a prudent measure to ensure its sustainability.

But the question has been asked on whether members are aware of how this will affect them when they retire. More importantly, whether members even have a retirement plan.

While little has been documented on the level of awareness among members on retirement planning, the Capital Markets Development Authority (CMDA) believes there is very little awareness and very few consciously take the time to reflect and document what kind of lifestyle they want to live after they reach 55 years old, how much money they would need to support their lifestyle and what they should be doing now to ensure they can meet the future cost of that lifestyle.

"The CMDA has tried to create awareness on the need to plan early for your retirement through our public investing seminars. This is an area the CMDA is mindful of, particularly as more members are now using their FNPF to fund activities other than retirement," says CMDA manager corporate finance and licensing, Suresh Ram.

"Last year, we conducted seminars at workplaces as well as public seminars in Suva and Nadi to over 539 participants. The feedback that we get is that most people have no idea what they will receive from their FNPF pension and have not given any real thought to retirement planning," Ram adds.

FNFP members...waiting to be assisted at the FNPF office in Suva.

Given FNPF's uncertain pension rate future, members seriously thinking about their pension income may consider looking at the capital markets for supplementary income.

"We believe the capital markets offer opportunities for people to grow their wealth and supplement their pensions," says Ram. "For this reason, the CMDA is looking at introducing a new brochure and also encouraging more people to use the CMDA personal wealth calculator to start their retirement planning early during their working life."

He lists some options that can be considered as alternative sources of income for the future:

o The unit trust market: even within the unit trust market, several options are available for investors depending on their particular needs and objectives. For example, there are some unit trust funds that offer only income return whilst others may offer both income and capital growth. There are also overseas-based unit trust funds in Fiji;

o Share investments: you can buy or invest in shares from the public companies listed on the South Pacific Stock Exchange or buy shares from private or unlisted companies. While share investment offers higher returns, it also carries high risks. Research shows that share investment generally outperforms all other classes of investment assets when held for longer terms.

o Bonds are another investment alternative that also offer good returns, but not commonly known.

o Other investments that can be considered are bank term deposits, property or real estate or even a business venture.

"But before making the investment decision, the CMDA recommends that investors read and learn as much about the investment, and try and talk to a licensed advisor first before making the investment decision," says Ram.