Assessing FNPF's Pension Model_ Mercer

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FNPFSymposium

May 2011

Richard Codron, Consulting ActuaryAuthorised Representative #263844 of MercerInvestment Nominees Limited AFSL #235906

This advice is provided by Mercer (Australia) Pty LtdABN 32 005 315 917 which is a corporate authorisedrepresentative #260851 of Mercer InvestmentNominees Limited ABN 79 004 717 533 AFS Licence#235906


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Agenda

Challenges Facing Retirement Systems

Key Points FNPF

Conversion Factors

Remove Minimum return and CapitalGuarantee

De-monopolisation

Financial Sustainablity


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Challenges Facing RetirementSystems

Increasing longevity of pensioners.

Ageing population - Post World War 2baby boomers reaching retirement age.

Retirement savings levels insufficient.

Retirement ages too low.


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Examples of Areas for Improvementin Other Systems

Australia

Mandatory Contributions of 9% too low.

No compulsion to take a portion as lifetimepension.

Increase retirement age.

Reduce costs by creating greater efficiency(too many funds, too complicated)


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Continued

Brazil

Early access to money.

No minimum level of contributions.

Increase retirement age.


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Continued

Japan

Require part of retirement benefit to be paid

as pension Introduce tax incentives for voluntary

savings

Raise retirement age to reflect increasinglife expectancy


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Continued

Singapore

Increasing amount set aside for retirement

Increasing labour force participation rate

among older workers

Investing a proportion of contributions inshares and property


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Malaysia

Introduce 3rd pillar to complementEmployees Provident Fund

Voluntary private sector savings schemes

Approval by Securities Commission

Tax relief on contributions up to RM6000(F$3500) to national scheme extended to

private schemes

Diversify long term savings


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Key Points FNPF

Fijian retirement system ranks well but is inneed of reform in a number of key areas

FNPF cannot fulfil the function of socialsecurity pension but it can help toreduce the need for such support

Retain accumulation fund with lifetime

pensions

pension more efficientmanagement of longevity risk


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Key Points Continued

Separate the members accounts into Preserved

and General Accounts

Stricter criteria for withdrawals especiallyPreserved Account

Mandatory conversion of Preserved Account tolifetime pension (minimum requirements to avoiduneconomic payments)

Actuarially sound conversion factors based onage, sex and single joint life


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Offer lifetime pension, term annuity or lump

sum for General Account

Remove both 2.5% interest guaranteeand capital guarantee

Set Investment policy for each Divisionbased on risk profile of section. Allocate

investments accordingly.No need to unitise investments and

systems.


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Notionally split the Fund into Divisions:Active Members, Death Benefit CurrentLifetime Pensioners, New LifetimePensioners and Term Annuities for

management accounting and monitoring

Seek Government approval forinternational investment to diversify risk

Introduce sliding death benefit scale


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Conversion Factors


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Financial Assumptions

Based on the Funds current asset allocation, yield on the

portfolio and the Funds recent experience assumed agross investment earning rate of 7.0% per annum in future.

Over the past five years, expenses have averagedbetween 0.4% and 0.5% of net assets.

Assumed a Fund investment earning rate, after operatingexpenses, of 6.5% per annum.

To build in margin for future pension cost-of-livingincreases of 2.5% per annum, 4% per annum used to

determine conversion factors.


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Mortality Assumptions

Mortality rates is the 2008 Fijian population

life tables prepared by the World HealthOrganisation.

Mortality improvement based on experienceof the Australian population over 25 yearsas reported in the current Australian LifeTables (2005-07).

Future life expectancy at age 55 for a maleis 18.9 years and for a female is 22.6 years.


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Conversion Factors

Use factors based on 4% per annum interest

return

Why?

Allows for lifetime pensions to be increased for

to assist with cost-of-living (about 2.5% pa). Solvency buffer in the Pension Division - lower

returns increase in longevity.

Pension Division can manage its own risks andbenefit from any favourable experience.


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Continued

Disadvantage: lower starting pension

If decide to use higher factors recommend6.5% per annum interest rate factors.

Who bears risk? Reduce pensions ifexperience is poor?

Risk of poor experience/profit from good

experience allocated to Active Members toavoid need to reduce pensions if experiencepoor.


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Factors 6.5% pa

SingleLife SingleLife JointLife JointLife

Age Male Female Male Female

55 9 8.4 7.3 7.7

60 10.1 9.3 7.9 8.4

65 11.6 10.5 8.6 9.3


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Remove Guaranteed Returnand Capital


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Remove 2.5% Minimum Return andCapital Guarantee

The provision of a minimum return and/or capitalguarantee requires reserves to be accumulated.Members balances grow slower so those retiringdo not benefit from the reserves held back

Makes it more difficult to invest in assets withlonger term growth prospects as theseinvestments are more risky and volatile therefore

increasing the level of reserves required


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Continued

Difficult to introduce member investment

choice in the future if guarantee in place

If the reserves held back are insufficient tomeet the guarantees then the Fund may beinsolvent. Solvency could be restored

only by holding back future returns

Those who remain fund their own guaranteeas lower rates credited to rebuild reserves


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Continued

Only those few that retire while Fund

insolvent benefit

May cause concern among members ifknown who may want to withdrawn

money/avoid making more contributionsuntil Fund solvent again


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De-Monopolisation


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De-Monopolisation

Most individuals do not have financial

background to make informed decisions onsuperannuation

Significant risk of unscrupulous behaviourUK mis-selling scandal

Significant risk of creation of stock marketbubble and collapse if new providers sell

equity based products as Fijian stockmarket relatively small


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Continued

Financial institutions unlikely to offer

competitive lifetime annuities

High responsibility on Government tooversee new providers to protect public

Offer partnerships to other institutions withproper credentials in investment, insurance,micro-finance to assist reducing FNPFdominance and development of strongerfinancial services industry


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Financial Impact of Changes

Fi i l S i bili


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Financial Sustainability

Introduction of actuarial conversion factors and removal of

2.5% interest and capital guarantee means: Reserves will be released so that bonus can be added

to members accounts helps to sell the new scheme

Future interest credited to members will be higher as noneed to hold back reserves - helps to sell the newscheme

Financial sustainability improves significantly residualrisks are:

Lower than expected returns in Pension Division

Higher than expected improving mortality in PensionDivision

Poor claims experience in Death Benefit Division

Fi i l S i bili


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Financial Sustainability

If 4% factors

Lower than expected returns in PensionDivision less likely

Returns above 4% provide buffer against

improving mortalityEasier to remove pension increases

granted from surplus earnings over 4%

level


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C ti d


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Continued

If death claims poor either reduce insurance

amount or interest rate in Active Division

See if catastrophe cover can be

implemented but may be expensive


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Assessing FNPF's Pension Model_ Mercer

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