A New Retirement Savings Act_ Promontory

8/6/2019 A New Retirement Savings Act_ Promontory

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1Promontory Financial Group Australasia

Date

Shauna Tomkins

Stephen Mason

May 2011

Fiji National Provident Fund

A new Retirement

Savings Scheme


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Introduction

Brief History

Role of FNPF

Key features of current Scheme

Reviews and Analysis World Bank &

others Issues, Policy Goals and Proposals


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Selected History

Cap 219 established Fiji National Provident Fund

August 1966. Social objective - to establish self-

funded retirement savings scheme for financial

security in retirement

Amendments since but no comprehensive review

to ensure continued relevance, best practice,

supervision some amendments proved costly 1975 introduced first pension product single

premium lifetime annuity PCR 25%/16.7%


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Brief History (cont)

By 1992, first public warnings that pension scheme

not sustainable. ILO recommends PCR ~10%

1998 amendment lowers PCR to 15% over 10 years

Successive FNPF Boards loosened early withdrawal

restrictions


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Brief History (cont)

2000-now: multiple reviews identify weaknesses

and sustainability issues

o including ILO, World Bank, IMF, FSAP, SCE, actuaries and auditors

and other commentators.

Attempts for urgent change fail

GFC combined with poor investment decisions

expose weaknesses


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Role of Retirement Savings in Fiji

In many respects, FNPF incredibly successful:

forced savings where savings tradition poor

helped meet financial security goal

In some respects Too successful:

relative size, capital markets influence, monopoly

40% of financial sector/assets are 60% GDP

Major domestic savings and savings mobilisation

vehicle, major player in Fijis economic

development


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Key Features of Current Scheme

Self-funded Defined Contribution scheme - 8%+8%

Some Defined Benefit Characteristics

Guaranteed minimum crediting

Capital Guarantee

No meaningful preservation requirements.

Fundamental social objective compromised through

ease of early withdrawal



Reviews and Analysis

As far back as 1992, warnings that the Pension

offering was unsustainable

In 1998 following ILO recommendation to set PCR

at 10%, Board opted for 15% achieved by 2008

Financial Sector Assessment Program 2007

(IMF/WB) recommended:

o Ensuring pensions actuarially sound

o Better diversification of assets

o Transition away from FNPF monopoly



Reviews and Analysis (cont)

A number identified the social problem of wealth

distribution from current members to pensioners

and from poorer to wealthier members

Strong recommendations for splitting pension

business from the savings business

Thathigher rate of pension will be subsidised by allthe younger generation who are coming in thefuture

Wadan Narsay From Hansard 18 March 1998



ISSUES, POLICY AND PROPOSALS



1. Sound and Sustainable

Provision of Financial Products Current annuity contracts require substantial

transfer of earnings from current members in the

form of subsidies this is hidden because of thesingle balance sheet

Risk management objectives of Contributions

(savings) Business and Pension (insurance) Business

in conflict on the same balance sheet

Self funded scheme & therefore individuals benefit

in retirement dependent on individual savings only



1. Sound and Sustainable - Policy

Separate savings and annuities businesses iaw best

practice

Only provide financial products that have actuarially

assessed as sustainable

Pension conversion rates

Allocate appropriate reserves to meet the run-off of

current pension contracts

Ensure Defined Benefit features are supported by

appropriate solvency requirements


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1. Sound and Sustainable - Proposals Separate activities create at least two funds

pension and savings

Allocate appropriate assets

Benefits: transparency,

quarantining of assets and risk management,

avoids cross-subsidisation


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1. Sound and Sustainable - Proposals

Solvency requirements applied to all activities

Actuarial assessment to support new products,

services, investment allocation or changes

Annual financial conditions report

Re-evaluation of all parameters and assumptions

every 3-5 years


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2. Refocus on Retirement ILO and others emphasise the need for the scheme

to provide replacement income in retirement not

lump sum.

Supported by surveys of retirees who have taken lump sum

Only income product is Lifetime Pension

Requires high levels of savings

Not available to many workers

Individuals benefit in retirement dependent on

individual savings only. FNPF must maximise

savings through a members working life


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2. Refocus on Retirement

Policies and Proposals Require meaningful Preservation of a majority of

contributions saved until retirement:

Establish two accounts: Preserved and General - 70/30 allocation

Strict limits on early withdrawals

Potential to generate replacement income at more than 60%

Lift limits on voluntary contributions (subject to tax

policy limitations)


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2. Refocus on Retirement

Policies and Proposals

Mandatory conversion of a minimum sum to

replace working income (driven by Base Pension

rate TBD)

Minimum sum from Preserved Account only

excess and General Account Balance can be taken

as top up, lump sum, alternative products New pension products including account based

pensions and Term Annuities to provide alternative

income stream for members with lower savings


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3. Coverage, Collection and

Enforcement Many workers not covered by the current Scheme

Employers avoiding the spirit of the law the alternative employment

arrangements

Non-compliance by Employers

No systems or powers to facilitate information

sharing between FNPF and FIRCA and ors to

improve compliance monitoring

Inadequate powers to enforce compliance with

employers obligations including recoveries on

behalf of workers


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3. Coverage, Collection and

Enforcement

Policies & Proposals Ensure as many Fijian workers are covered by the

scheme by alignment of definitions and exemptions

in the Law with FIRCA Minimise the number of exemptions

Implement information sharing with relevant

agencies to improve monitoring and compliance Comprehensive enforcement powers

Amnesty to encourage employers to comply


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4. Governance and Reporting

Law is silent on many aspects of Good Corporate

Governance

RBF Policy Statement addresses only some of theGovernance Issues fit and proper etc

Perceived lack of independence of the Board of

FNPF and concerns over political interference

Disclosure and reporting to members have not kept

pace with accepted practices


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4. Governance and Reporting

Policies and Proposals Restructured Board

7 members 3 representative/4 independent

Appointed by Minister iaw transparent nomination

process

Emphasis on experience and skills mix for the Board

Fit and proper person requirement including Codes

of Conduct

Enhanced disclosure in annual reports and to

members


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5. Other issues

Education role particularly retirement planning

Practical difficulties on divorce will be addressed

Continued appropriateness of 55yo as entitlementage

Appropriateness of 8% + 8% mandated contribution

Alternative product development andDe-monopolisation

Financial Services Ombudsman


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Summary

Proposals to ensure the financial sustainability

include actuarially assessed provision of benefits

such as pensions, separation of funds, solvency

reserves, stronger governance

Improved transparency through separation of funds,

financial conditions reports, appointment of boards,

reporting to members

Ensuring Fijis retirement savings scheme is fair

through coverage of workers, removal of cross-

subsidisation, better products and refocus on

retirement


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A New Retirement Savings Act_ Promontory

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