Some nine months ago I said I wouldn’t write about the FNPF reforms again. Which doesn’t mean I haven’t followed the further correspondence with interest. Recently the government decision not to make further compensation understandably led to an anguished response. Next the FNPF presented its take on things. And made a strange error while doing so. I had been wondering whether or not to break my resolve and write to correct it, but now that Professor Wadan Narsey has produced an excitable reaction based on that error, I guess I have no option.
There never has been any such thing as a Pension Buffer Fund
CHECK the old legislation, CAP 219, if you have doubts. It is not mentioned anywhere.
The FNPF General Reserve, beginning in 1966, showed a Special Death Benefit Reserve to record the balance of SDB premiums received less SDB payments made. From 1975 onwards it added a Pension Buffer Reserve to record the balance of conversion sums received, 2 per cent levies received, and annuities paid out. But these are simply records of accumulated net income and expenditure, not funds. It was not until the 2011 reform that separate funds were created.
FNPF should know all that, so why they used the expression “Pension Buffer Fund” in their statement is a mystery.
What should actually have been legislated in 1975
Talking of funds (as opposed to accounting reserves), the minimum the legislation for the 1975 annuity option should have required was:
- A fund set up outside of the FNPF;
- Actuaries employed to set a base pension rate which would have been supportable from conversion sums alone;
- If a subsidy to encourage take-up and/or compensate for low accumulations was thought desirable, provision for transparent government support out of tax revenues; and
- Accounts to have included a statement of the accrued liability for base pensions and any supplements.
As we know, none of this happened, and eventually the chickens came home to roost, so to speak.
Professor Narsey continues to misquote the consultants Promontory
In a preliminary report, Promontory did signal some concern about the legitimacy of reducing annuities in payment. In their final report, however, they made their view clear. Entitlement to annuities was statutory, i.e. given by government legislation, and could therefore be amended, rather than being a matter of contract. I have already pointed this out, apparently to no avail. One can of course disagree with Promontory’s view, but it’s no excuse to keep promulgating something you should know is incorrect.
Fairness and stewardship, and broken promises
I’d like to commend a recent letter from Colin Deoki. He makes some very good points about the need for a retirement system to be governed by a strong sense of fairness and stewardship in order to ensure ongoing trust. If I might make a criticism, it is that the letter was focused on the interests of pensioners; whereas all participants, pensioners and non-pensioners alike, need to be able to have trust in their retirement savings system.
Let’s not overlook that the promise to keep paying pensioners at their original rate is not the only promise that has been broken. When the FNPF began in 1966, contributors were promised that all their contributions would go into savings accounts in their name, and that these accounts would benefit from all the investment earnings on the assets.
These promises were broken in 1975, when the pension option was introduced. Suddenly all contributors saw 2 per cent of their wages diverted for the benefit of those who opted for apension – which realistically was only ever going to be a restricted number of retirees, those with adequate other wealth (and health).
Furthermore, because this pension option arrangement was placed within the FNPF and not established as a standalone operation (as would normally be the case), it exposed contributors to loss of automatic entitlement to all investment earnings on their contributions before retirement.
I do get it that in 1975, retirement sums would not have been high, and that some level of supplement to encourage take-up may have been desirable. But it should properly have been financed out of tax and been fully transparent. What was actually enacted was simply not fair.
Past pension conversion rates were extraordinarily generous
Readers may not appreciate the full extent of the generosity. Broadly speaking, a 25 per cent rate returned full value of the conversion sum within 5 years, and a 15 per cent conversion rate full value within 9 years. But on average, ordinary retirees at age 55 could expect to live a further 18 years or so, at least from the 1990s onwards.
You don’t believe me? The Fiji Bureau of Statistics provided tables in 2021 showing life expectancy at age 55 (averaged over males and females) of 18.3 years. Yes, life expectancy at birth was only 66.6 years; but if you are among those who make it to age 55, these tables state you will on average live one and a half times longer than the result of deducting 55 from birth life expectancy.
Before these Fijian tables were available, actuaries had to rely on population estimates developed by the World Health Organisation and the United Nations. These are widely used and generally considered reliable in the absence of specific local data. They are caveated as being more applicable to urban populations than rural ones, since more reliable data was available for the former.
The WHO models for 1990, 2000, and 2008 showed expected life at birth and expected life at age 55 as 67.6 and 19.9, 67.9 and 19.9, and 69.2 and 20.6 respectively. These are higher than the Fijian 2021 results, but that was to be expected since WHO estimates were urban based. An estimated lifespan at retirement of 18 years from the 1990s onwards seems perfectly credible.
Bonus pensions
What this then tells us is that pensioners retiring in the 1990s, with a 25 per cent conversion rate, got not only their base pension (what their own savings would have supported), but in addition a bonus pension more than twice the size of their base pension. That’s quite a lot. (Arithmetically, (18-5)/5, or 2.6 times …).
For the period before 1990 I’m still looking for data. At a rough guess, though, based on figures for expectation of life at birth between 1975 and 1990, I’d expect average lifespan at age 55 in 1975 might have been at least 10-12 years, increasing reasonably steadily to 18 years by 1990. That’s still a minimum bonus pension equal at least to the base pension, right at the start.
The bonus pension as a multiple of the base pension would have dropped a bit after 1999, as the 1999 gradual change in pension conversion rates from 25 per cent to 15 per cent came into effect. But even by 2009, retirees opting for pension were still getting a bonus pension equal to their base pension.
Merit or wealth?
I suggest we’d all be more comfortable with claims for compensation if we had a sense that these bonus pensions were properly earned. But as already said, the people who could opt for pension could do so because they were already financially well-off.
Less fortunate people simply couldn’t afford to tie up their retirement savings in a pension, since there was no access to capital in the event of need. (Which of course is why the new drawdown accounts are proving so popular, even though there is no lifetime guarantee.)
The apparent increase in take-up rates in the 2000s masked partial conversion. Retirement sums had become larger, and more retirees could afford to put a little aside for pension. But the actual percentage of retirement sums taken as pension peaked at around 13 per cent between 2003 and 2005, and otherwise rarely exceeded 10 per cent. With drawdown, provision for income in retirement is now already well on the way back to 10 per cent after only a year.
If you want to argue that those who had modest conversion sums – up to $15,000 or $20,000, say – still merited some supplement, fine, but then, by design, this group on the whole were unaffected by the reform. Otherwise, owning entitlement to bonus pension looks more like a matter of wealth (or luck) than genuine merit.
A not altogether unrelated question: Does anybody know the distribution of monthly income among Fiji’s 90,000 over-60-year-olds? What percentage get over $300 per month, the level protected in the reform?
Solvency, briefly
Once the Reserve Bank of Fiji required the FNPF to hold 10 per cent of contributor accounts as a solvency reserve, the FNPF became insolvent. The only question was how to deal with that.
There were two main options. One was to reduce the liability for pensions, by cutting back the bonus pensions. The other option was to borrow money from the government, and pay it back over time out of the earnings on contributor accounts – reducing future credited interest rates, in other words.
The first option required breaking the promise to keep paying pensions at the original amount. The second option required continuing to break the promise originally made to contributors in 1966, i.e. that investment income earned on their contributions was theirs.
For those without a financial interest either way, the primary question would seem to be: Why had bonus pensions been granted? Obviously reducing bonus pensions was likely to cause hardship, but what were the grounds for granting them in the first place?
A not unrelated question: Why was the 1993 recommendation from the International Labour Organisation to rapidly reduce the pension rate to a sustainable 10 per cent ignored? After all, had it been heeded, the promises broken in 1975 would have been repaired, and no need for a broken promise in 2011.
One neutral, the World Bank in 2007, was quite clear that contributor protection had to be restored. No justification for bonus pensions existed; they were a transfer from the poor young to the wealthy old. The consultants Promontory came to much the same view. Pensioners had already enjoyed the benefit of a significant amount of contributor money which could not be recuperated; turning off the tap might be harsh, but was fair.
Conclusion
No disagreement that many of the pensioners in 2011 facing a loss of their bonus pension had a hard time of it. For the higher income ones, it will have necessitated stressful adjustments to their lifestyle. Not only in financial terms – they had come to see their bonus pension as a right, not a privilege. They felt they had been trampled on, and clearly still do. I would like to think what I’ve set out here will help them understand, but possibly too much water has gone under the bridge for that.
But in summary: Repairing one lot of promises broken in 1975, and not adequately addressed in 1993, eventually necessitated another broken promise in 2011.
Honestly, didn’t paying un-earned bonus pensions out of the FNPF at the expense of all members have to stop, if only for the sake of fairness and stewardship, and the basic integrity of the Fijian retirement savings system?
- GEOFF RASHBROOKE was contracted to provide technical assistance to FNPF on developing actuarial and data analysis capacity. The views expressed herein are his and not of this newspaper.
