Good Practices in Social Security Good practice in operation since: 2011
Reforming the FNPF pension scheme A case of the Fiji National Provident Fund
Fiji National Provident Fund Fiji
Published 2012
www.issa.int
Summary The Fiji National Provident Fund (FNPF), commenced in 1966, and is Fiji’s only national worker’s retirement savings scheme, taking mandated contributions from employees and their employers and accumulating these into a retirement fund. The principal role of the Fund, as with other fully-funded provident funds, is to accumulate benefits for retirement. In the case of the FNPF, an option to receive a pension was introduced in 1975 on a basis which was quite clearly not sustainable, and hence was going to require significant subsidy from active members. By 2011 the scale of the problem was such that drastic reform became essential. The decision in 1975 to offer retiring members a pension from attainment of age 55 commenced with the provision of 25 per cent for a sole pension, and 16.7 per cent for a joint pension. As the rate did not change with age, there was more incentive to take the pension from age 55. It was possible to do so and remain in work, although subsequent accumulations were prohibited from being applied to a pension and instead had to be taken in cash.
CRITERIA 1 What was the issue/problem/challenge addressed by your good practice? The basically unsustainable nature of the pension conversion rate finally became the subject of serious examination some 15 years after its inception. Various consultations carried out on the social benefit scheme cautioned against further operation of the unsustainable Pension Scheme. The World Bank report (2008) described the annuity business as highly unsound and the International Labor Office (ILO) actuaries report (2006) recommended the conversion rates be brought down to 10 per cent. The financing of the pensions, by transferring resources from active workers, was characterized as a heavy cross-subsidization from poorer and younger workers to older and richer ones. A reform was initiated in 1998 with a phased reduction from 25 per cent to 15 per cent over 10 years from 1999, with the cessation of the unfair Pension Buffer Fund levy in 2000. The assessment of the liability in the accounts highlighted the insolvent status of the Fund in continuing with the unsustainable provision of pension. Modelling work done by actuaries indicated continued solvency would require continued diversion of a part of the return on investment earned on member account balances to instead support existing pensions, of something like 50 to 100 basis points.
CRITERIA 2 What were the main objectives and the expected outcomes? The principal policy recommendations were: 1. 2. 3.
Place the annuity business on a sound and fair actuarial basis. Implement a separation of accounts by major area of activity. Compile detailed records on the mortality of pensioners.
A reduction in existing pensions was a fundamental requirement of any reform to halt further cross subsidy from active members. Analysis of the accounts as at 30 June 2011 showed the
2 solvency position as per Summary 1. The actuarial valuations had assumed pension liabilities would be backed by the portfolio’s long-dated, high coupon bonds, anticipated to yield an effective return of 7 per cent per annum on book value over the course of the term of the pensions in force. Summary 1: FNPF solvency, 30 June 2011 Total assets Member accounts Solvency reserve for above Pension liability Death benefit reserve Pension solvency Total liabilities (Deficit)/Surplus
Fiji dollars (FJD) million 3,768 2,997 300 565 19 0 3,881 (113)
The crux of the matter was that the Fund was insolvent already and given that there were no alternative funding or financing means, it was important the liabilities accruing from the unsustainable pension business was addressed with the intention of reducing them.
CRITERIA 3 What is the innovative approach/strategy followed to achieve the objectives? Noting that pension conversion amounts for current pensioners totalled FJD310 million as portrayed in Summary 1, the proposal developed to address the problem above involved giving back to pensioners their conversion amounts. This effectively frees up FJD255 million; after setting aside FJD113 million to meet the deficit above, and another FJD31 million as an ad hoc provision for a pension solvency reserve. These pensioners would then be invited to re-invest in the life pension product characterized by the actuarially-fair rates that would be introduced without phase-in. FJD111 million was identified as solvency surplus that was proposed to be redistributed back to the pensioners by way of “top ups� to mitigate the reduction effect for those on the lower levels and provide some minor incentive for those on the higher levels. The financial situation would then become: Summary 2: Revised FNPF solvency, 30 June 2011 Total assets Member accounts Solvency reserve for above Pension liability Pension solvency Death benefit reserve Total liabilities (Deficit)/Surplus
Fiji dollars (FJD) million 3,768 2,997 300 310 31 19 3,657 111
The principle design issue of the top-up assistance was a redistribution matter since reductions would otherwise have been in proportion to the pension. As reductions were of the order of 40 to 50 per cent or more, except for the older pensioners, those on very little would have had even less.
3 Design elements for the top up were considered in three parts: • • •
a minimum pension; a protection level, below which no pension would be reduced; a sum from which additional pension could be bought.
To qualify for the top up, all the refund had to be reinvested in a new life pension. This was partly for administrative reasons, but also to signal that the purpose of the top ups was to encourage maximum annuitisation. To ensure that pensioners were confident of getting some value for money, the new pensions are guaranteed for five years. However, extending the guarantee to the top up pensions was thought to unduly advantage older pensioners, and hence the top up pensions are not guaranteed.
CRITERIA 4 Have the resources and inputs been used in an optimal way to achieve the set objectives and the expected outcomes? Please specify what internal or external evaluations of the practice have taken place and what impact/results have been identified/achieved so far. Given the reliance on pension renewal certificates, particularly from remote areas where compliance with checking procedures was difficult to monitor, the potential for fraud is clear. Hence with the cash refund “in play” it was essential to take the opportunity to validate all current pensioners. FNPF staff were seconded to be “pension counsellors”, and were given training in the background to the reforms, how to manage pensioner interviews, and other skills. A centralized pension counsellor database was developed, with multi-user access, and operable from remote locations. Despite some teething problems, this appears to have worked well. The pension interview was an opportunity for the advantages of retaining a pension to be talked through, and other courses of action discussed. As a side effect, the staff carrying out the counselling has been, of necessity, up-skilled in knowledge of financial products, which may have positive downstream effects for the currently under-developed financial services sector. By June 2012 around 10,000 of the 11,000 or so pensioners on the books had had face to face interviews, including Skype interviews for those residing overseas. Scanners were used to capture validation documentation, as well as photos and thumbprints and uploaded to a Pension Administration System which is an effective modern replacement of the archaic system that managed pension payments under the old pension scheme.
CRITERIA 5 What lessons have been learned? To what extent would your good practice be appropriate for replication by other social security institutions? With the reforming of the Fund operations and various products provided to members and pensioners, it was critical that the system operate on a sustainable and sound base. Given the
4 sensitivity of the issue involving pensioner income and belief that any reduction in existing pension is a breach of the “contract� the Fund undertook with them, it was a challenge communicating the position the Fund was placed in. Most social schemes are not faced with the challenge the Fiji superannuation fund was in, but the innovative approach taken to implement sustainable changes is an example set for other institutions.