I’M in full support of Professor Vijay Naidu, chair of the 2012 Pensioners Committee contesting the 2011-2012 FNPF reforms.
An independent tribunal to investigate the 2011 FNPF pension reform cannot come soon enough for no other reason than to provide something sound from which to assess Dr Wadan Narsey’s latest assertions.
For example, such a tribunal would have to state the obvious; there never was a Pension Buffer Fund established by Parliament.
Yes, the FNPF accounts showed a reserve called the pension buffer reserve (PBR). It recorded the running total of the 2 per cent levies received, conversion sums retained to obtain pensions, and pensions paid out.
This was to identify assets held to pay pensions, and thus not available for credited interest declarations. Likewise, the special death benefit reserve (SDBR), which was set aside for paying death benefits.
But reading the legislation (which I recommend) will show that interest could only be credited to member accounts, not to reserves. Refer section 8 of the previous FNPF Act.
So let’s be quite clear. Although contributors and pensioners were all members of the FNPF, the legislation provided that the only use for assets held in the General Reserve, less the PBR and the SDBR, was meeting administration expenses and crediting interest to member accounts.
I can offer no explanation for this arrangement. It was apparently thought the 2 per cent levies would be adequate to support generous pensions on their own, although I am unaware of any actuarial modelling. It looks very ad hoc and not well thought through.
(I do need to record that may not be quite the whole story. Regulation 49 (3) says “the general reserve account shall be disposed of by the board from time to time in such manner as the board shall deem appropriate in the furtherance of social security measures.”
The regulation predates the introduction of the pension option. I am unclear as to its purpose. And any application to the reform seems unlikely. But it is there.)
Be all that as it may, I can’t imagine an independent tribunal would conclude anything on the PBR much different from what I have set out here. So the chances of expert support for Dr Narsey’s views on this seem slim.
Developments in 1993
Next up is the International Labour Organisation (ILO) report in 1993. This said that pension conversion rates had to be reduced to 10 per cent. It also said that if this was phased in over 10 years, there would be no need to reduce the pensions in force in 1993.
The Blaxland report, cited by Dr Narsey, was prepared in 1994 on behalf of the Fiji Employers Federation. It endorsed the ILO recommendation, including reduction over 10 years to 10 per cent. It accepted the ILO view that if this was done, no change to pensions issued up until 1993 would be necessary. An important caveat that Dr Narsey does not record.
As we know, it took until 1999 for Parliament to act on the ILO report. Parliament did not accept the need to reduce the conversion rate to 10 per cent, preferring to take it down to 15 per cent by 2008. It did not apparently take heed of actuarial advice, preferring instead to water down what the ILO had proposed.
I am confident that actuarial advice to an independent tribunal would say that 15 per cent was too high, and 10 per cent probably about right for the time. Dr Narsey concedes a 25 per cent rate was too generous, but excuses his preferred 15 per cent rate on the basis that many pensioners had been dying before getting their conversion sums back.
If you think this through, though, he seems to be saying many people who get to age 55 die within the next seven years (seven times 0.15 =1.05). If this had been happening to any large extent in Fiji, wouldn’t we have noticed? Statistics show expectation of life at age 55 for Fijians has been about 17-18 years.
I do wonder what that Parliament in 1999 was thinking. It cancelled the inequitable 2 per cent levy, but seems blindly to have thought the sum built up in the pension buffer reserve would be adequate to fund pensions going forward.
That might possibly have worked had Parliament acted earlier and taken the pension down to 10 per cent. What actually happened was that retirement benefits kept getting higher, more people became aware of the generous pensions on offer, and more money flooded in at unsustainable rates.
Moving on to the position in 2011
By 2011, the liability for pensions in payment had become $565million, and the PBR stood at only $81m.
Given that under the law the FNPF could not boost the PBR, so this was insolvency.
It’s at this point that I am going to say something counter-intuitive. The 2011 FNPF reform did not directly set out to reduce pensions.
Take a deep breath. What the reform did was terminate all the pensions in payment, and give pensioners their money back. This was regardless of the amount of pension already paid out.
Some people had received their conversion sums back several times over by this time. But they still got their full conversion sum anyway.
Termination and refund was a shock to those affected. But of itself it doesn’t appear to be financially unfair and is not unprecedented. This certainly was the view of the consultants advising on the reforms; a view Dr Narsey continues to fail to represent in full.
Nobody lost a cent of their own money. All did better than non-pensioner retirees, some significantly so.
Following the refund, the pensioners were encouraged to reinvest their conversion sum for a pension at age-related sustainable rates. The older they were, the higher the conversion rate.
It is perfectly true that for about a third of pensioners, exercising the option meant getting less pension than they had beforehand. (I’ll come back to the other two-thirds in a moment.)
And yes, there’s an argument that having lost entitlement to that extra pension was a betrayal of trust. But stop and think a moment. If you were getting more than your own savings would support, somebody else had to pay.
Was that fair? Just? Equitable? Had the people having to do the paying given their informed consent?
I don’t want to downplay the impact on those affected. But the loss of unsustainable pensions was simply the effect of reality cutting in.
So reductions were a consequence of the decision to terminate the unsustainable arrangements and refund the pensioners’ capital, driven by the financial position of the FNPF. They were not a deliberate attempt to isolate and harm a group of wealthier pensioners – as it sometimes seems to be portrayed.
Disagree? Let’s have that independent expert review.
How change addressed the inheres conflict of interest
This is the really crucial bit. What the reform did was to allow the FNPF to divert money from undistributed earnings to the pensioners; something it could not have done legally under the previous legislation.
The moral justification for doing this was that pensioners and contributors were equally members, as noted earlier, and that a compromise was the best way forward.
The amount needed to refund conversion sums was about $310 million, meaning $230m was needed from the General Reserve after allowing for the PBR balance. In addition, it was determined a further amount could be made available to finance top-ups for those who opted to re-apply all their conversion sums for pensions at the new, age-related sustainable rates.
That further amount was limited by the need to provide solvency for three new separate funds – one for contributors, one for pensioners, and one for the special death benefit. In the end about another $70m in round terms was taken from undistributed profits for the top-ups.
Now, how an independent tribunal would judge the top-ups would be interesting.
As I recall, the main concern was to protect those on the lowest pensions, while still providing an incentive to others. The $70m provided for a minimum pension of $100 per month, no reduction for pensions below $300 per month, and for the remainder, an increase in the conversion sum of 25 per cent of its amount but limited to $10,000.
(I wonder how many people realise that those with conversion sums over $40,000 got an extra $10,000 with which to purchase new pension?)
One could be hard-headed and argue there was no need for top-ups at all, leaving that $70m with the contributors.
Or one could argue, as Dr Narsey may be doing, that any top-ups should have been focused on those pensioners who were facing the greatest actual loss in income, rather than protecting those on lower pensions.
In the end, that’s a political argument, not an actuarial one. I’ll just note, though, that the cost of bringing all pensions up to at least $100 per month was about $8m as I recall. Rather less than the $54m budgeted to reinstate the lost pensions to surviving pensioners from 2024 onwards.
On another topic beloved by Dr Narsey, neither of us are qualified to comment on contract law, and would probably be better to stay quiet. However, as he has brought up the matter of the pension option form 9-OP, it might be worth recording what the form in use prior to 2007 actually says. I quote:
“Once you have made your choice it is final and cannot afterwards be changed or revoked. You should therefore consider most carefully what would be in your best interest.”
Note that it is your choice that is final, and that cannot afterwards be changed or revoked. It’s there to prevent pensioners asking for a refund later on, if their health deteriorates or they would like to spend the money on something else instead. Draw your own conclusions.
And to another favourite topic of Dr Narsey. There is a reason for low take up of annuities. They are unattractive to most people unless you bribe them. Low take-up does not reflect a lack of trust, and it is disingenuous of Dr Narsey to say so.
And who then meets the cost of the bribes?
People do on the other hand appreciate being able to get regular payments through draw-down, even if it means money running out if you live longer than you expect. The FNPF has been slow in offering this, but now that it is here, take-up is approaching 10 per cent of retiree lump sums.
Much like what bribery achieved, but without other people having to meet the cost.
(While numbers of retirees taking pension pre-2011 were higher, total conversion sum amounts rarely exceeded 10 per cent of total retirement benefits, because many people only using part of their retirement benefit.)
Conclusion:
So roll on the independent tribunal. I’ve expressed my views on what I think it is likely to conclude; and have explained my reasons. I’m pretty confident the importance of sound actuarial advice will be key.
But I’m just one person. Let’s see how an independent expert panel would rule, after listening carefully to submissions from all interested parties. In the meantime, could we have a little healthy skepticism as to Dr Narsey’s claims, in the light of what I’ve discussed here?
Geoff Rashbrooke is an experienced superannuation professional who served as FNPF fund actuary from 2011 to 2017. He continues to assist the FNPF Board as a member of its Audit and Risk Committee, but the opinions expressed here are his own and should not be taken as representing the views of the Board or this newspaper. Earlier experience includes a period of five years as NZ Government Actuary, where he administered the NZ Superannuation Schemes Act 1989.
