Total assets increased to

$3.9 billion compared with

$3.8 billion in 2011

F N P F A N N U A L R E P O R T 2 0 1 2 S U M M A R Y

FNPF Decree 2011Promulgated on 25 November 2011, the Decree provided the framework that enabled the Fund to commence the implementation of two key reform initiatives – the restructuring of the Pension Scheme and the strengthening of the Fund’s governance standards.

Pension RestructureThe priority of the Fund’s reform agenda was the restructure of the pension scheme to protect the future of our members, which was achieved through the following changes:

New Pension SchemeOn 1 March 2012, a new actuarially fair age-based life Pension scheme was introduced to replace the old scheme. Given the challenges encountered in this change, it is humbling for me to report that 68 per cent of pensioners opted to join the new scheme while the remainder exited the scheme with a total lump sum payment of $126.7 million.

Separation of BusinessIn line with industry best practices, the Fund separated its Pension business from the Contribution business through the creation of the Retirement Income Fund (RIF) to support annuity payments. Assets worth $252.7 million were set aside in RIF for this purpose.

Solvency RequirementIn compliance with Section 32 of the FNPF Decree 2011, the Fund provided assets of 10 per cent of member balances in General Reserves as a solvency requirement, as reflected in the financial statement. The pupose of this reserve is to ensure that the Fund would not declare a negative interest

rate on member balances, even if investment returns are be poor in a particular year.

The Fund, as required under Section 88 of the Decree and through its actuary, has complied with the requirement for a Funding and Solvency certificate for the separate sections of the Fund other than that covering member balances. The actuary has given a certificate as at 30 June 2012 covering the period up to 1 September 2013, stating that the value of the assets together with other assets accumulated during the period of the certificate, will be sufficient to enable the Board to meet the liabilities of the RIF.

This certificate is reviewed by the Reserve Bank of Fiji to ensure it meets appropriate professional standards and has also been peer reviewed by Mercer, a consulting actuary from Australia. A major objective of the issuance of the certificate is to demonstrate that even under adverse circumstances, which the actuary will need to consider under professional standards, the RIF will still have enough assets to meet pension payments without having to call on subsidy from members’ assets. This is an essential part of ensuring long term sustainability of the pension business.

New Pension ProductA new term annuity product was also introduced, providing monthly payment for fixed terms of 5, 10 and 15 years.

Strengthening Corporate Governance

Following a comprehensive consultation process with key stakeholders, new measures were introduced as part of the legislation to strengthen the Fund’s governance framework. In particular, the following key changes

were adopted:

Appointment of Board MembersA transparent appointment process is now in place to ensure that members have the appropriate skills and expertise to govern the FNPF effectively. A “fit and proper test” for Board members is conducted independently by the Reserve Bank of Fiji in compliance with the Decree.

Code of ConductA new code of conduct that governs ethics and business dealings is now in force for Board and Management.

Supervisory RoleThe Reserve Bank of Fiji’s supervisory role has been strengthened with specific guidelines and new regulatory standards.

Appointment of ActuaryAs a new requirement of the Decree, the Fund appointed an actuary responsible for valuing the FNPF’s liabilities, assessing solvency requirements, on-going monitoring of pension products, and issuing the financial condition reports.

Improved Disclosure to MembersForums will now be held annually to update members on financial performance, achievements, and other areas of interest to members. This is a new opportunity for members to interact directly with the FNPF Board and Management.

Financial PerformanceThe performance of FNPF for 2012 is reviewed extensively in this report, and I would only highlight a few achievements. All key financial indicators have improved and is above industry average in this part of

the world. Total funds attributable to members is $3.9 billion. Under extreme conditions we have recorded a net surplus after tax of $115.6 million. This is after paying out a massive $126.7 million to pensioners who opted to take the lump sum payment.

Interest to MembersIn a challenging operating environment, the Board was able to declare a competitive interest of 5 per cent, resulting in the distribution of $132.8 million to members.

Future OutlookIn 2013 we would be making substantial investments,and the rewards of such investments are expected to be reaped mostly in future years. While growing organically, the strategy would also include growth through acquisitions and also expanding beyond our geographical borders.

AcknowledgementI wish to take this opportunity to thank and convey my gratitude to my co-directors for their dedication, cooperation and guidance. We are fortunate to have in the Fund a capable and committed Management team and employees who have excelled in their performance in a challenging environment. We are also much obliged to our members for their understanding, trust, confidence and patience for having understood the changes that had to be done for the long term stability and the sustainability of the fund. We owe a debt of gratitude to the regulators and the government for their guidance and advice.

AJITH KODAGODAChairman

2012 has been a historic year for the Fiji National Provident Fund as it took decisive actions to address the long-unresolved issue of pension sustainability. Underpinning this change was the promulgation of the new FNPF legislation that placed the pension scheme onto a sustainable platform, strengthening Corporate Governance, with the aim to grow member value through excellent

services and prudent investment management. In striving to achieve our goals, we will work alone where necessary or together with others where it is in the best interests of our members. At all times our commitment to maintaining the highest ethical standards has been paramount. The Board and Management continuously review the strategic direction of the FNPF in a country that is stable and in a position to offer enormous opportunity for a fund of this nature.

Investment portfolio as pension funds were separated from the current members’ funds. Asset were transferred to the Retirement Income Fund (RIF) account for current annuitants and to the Supplementary account for those who opted to take lump sum payments.

Total transfers amounted to $440 million, comprising cash and bonds, therefore reducing the investment portfolio to $3.48 billion from $3.52 billion last year. Following the separation, the RIF account will be maintained for current annuitants and will be managed separately under its own policy. Other factors that influenced the performance of the investment portfolio during the year include:

• reduced borrowing by government and quasi- government bodies. • early redemption of bonds. • income earned from 2 of the major loan accounts.• additional offshore allocation by RBF. • a continuing rehabilitation process on the affected accounts in the portfolio.

Income Income for the Fund was $242.7 million compared with $238.8 million last year. The increase was a result of high yielding investments in both domestic and offshore bonds, term deposits, which were locked from 2011. Two major loan accounts under Commercial Loans commenced servicing their debts. The Fund structured its current account rates to earn maximum returns on the cash balances. As a result, the return on investment was 7.2 per cent compared with 6.8 per cent in 2011. This enabled the Fund to credit 5 per cent to members’ accounts on 30 June 2012. The income from the Retirement Income Fund totalled $7.2 million (reflecting 4 months of operations), bringing the consolidated investment income to $249.9 million.

Interest RatesThe interest rates continued on a declining trend as liquidity levels remained high. Strong competition for government bonds added to the downward spiral of rates as public tenders continued to be oversubscribed. The table below, outlines the interest rate movements in the year.

Fixed IncomeThe fixed income portfolio makes up approximately 84 per cent of the investment portfolio. Total income from this portfolio was $231 million compared with $222 million last year. This equated to 92 per cent of the total investment income for the financial year.

Government SecuritiesGovernment securities remained the dominant asset class, making up approximately 58 per cent of the investment portfolio. A total of $240 million in government bonds was transferred to the Retirement Income Fund as part of Pension Reforms. Investments in government bonds for the financial year were $77.6 million, compared with $237 million last year. Total portfolio closed at $1.98 billion compared with $2.06 billion in 2011.

Quasi-government securitiesThis portfolio consists of government guaranteed securities in statutory bodies. The portfolio closed at $231 million compared with $331 million last year. Total investments in quasi-government securities totalled $5 million compared to $51 million the previous year. The significant decline in the total floats by quasi-government securities is attributed to competitive lower rates offered by commercial banks.

Local Term DepositsThe local rates continued to decline during the financial year. The portfolio closed at $104 million compared with $173 million the previous year.

Offshore InvestmentsThe Board continued dialogue with RBF for additional approval of offshore investments, resulting in the approval of $40 million for the 2012 calendar year. This was in addition to the $150 million approved in the 2011 calendar year. A total of $90 million was invested mainly in foreign equities, bonds and term deposits during the year.

Fiji Government US Denominated BondsThe Fund continued its acquisition of these high yielding bonds. Total investments in 2012 were US$11.69 million bringing the total portfolio to US$31.65 million compared with US$20.24 million last year.

Foreign Term DepositsA total of $20 million was invested in foreign term deposits. The portfolio closed at $86 million, compared with $59 million last year. The deposits were predominantly in US dollars.

Commercial Loans

The loan portfolio grew to $415.0 million from $272.8 million, with a mix of financing to both existing and new clients. Income mirrored the growth in the portfolio and grew by $17.6 million, contributing returns to members. The rehabilitation process from last year continued into this year with the Momi project being transferred from the loan portfolio to be developed as a separate project. The Natadola Development Project commenced the process of developing residential lots, whilst foreclosure proceedings were observed for Savusavu Harbourside.

Equities

Offshore EquitiesThe Fund made a significant decision to actively manage the offshore equities portfolio from previously maintaining a passive stance. This move was attributed to the need to diversify the investment portfolio, foreign exchange approval received by the RBF and higher yields generated offshore. The Fund appointed Legg Mason Asset Management Australia Limited as Fund Manager to actively manage the Australian equities portfolio and benchmarked to the S&P/ASX 200 Accumulation Index. A total of FJ$50 million was invested in the financial year. The offshore equities portfolio closed at $68.1 million compared to $20.1 million last year.

Local EquitiesThe year again focused on rehabilitation efforts targeting the non-performing companies and the result is evident in the stagnant local portfolio value from last year. The market value of the Fund’s local equity portfolio at year’s-end was $336.1 million compared with $319.7 million in 2011. The increase was due mainly to the reversal of impairment in subsidiary investments.

TreasuryLiquidity in the banking system remained at around the same high levels as in June 2011 to close at $533 million in June 2012. With high liquidity, interest rates continued on a sharp decline to low rates at the end of June as highlighted in the table above. This was underpinned by the low Overnight Policy Rate (OPR) which remained at 0.5 per cent from October 2011. The low rates posed a major challenge for the Fund, as the majority of assets are interest-rate sensitive. The Board and Management were continually advised on the liquidity status of the Fund, the impact of interest rates movement on its assets and the Fund’s strategies in managing its financial risks.

T he investment environment continued to challenge the Fund in 2012. The financial system was characterised by high liquidity that prevailed for the entire year and the pension reforms. The high liquidity in the market caused the huge reduction in interest rates. The portfolio, however, benefitted from the high rates locked in from 2011, particularly on Fixed Income securities, attributing to the

increase in income this year to $249.9 million that produced a resultant increase in Return on Investment of 7.2 per cent. The Pension Reforms had a major impact on the

Consolidated TheFund 2012 2011 2012 2011 $000 $000 $000 $000Investmentrevenue Interestincome 242,075 228,791 231,045 221,903Netpropertyincome 9,603 9,246 6,616 6,181Dividends 4,364 3,192 4,335 3,168Dividendsfromsubsidiaries - - 10,071 8,506Changeinnetmarketvaluesofinvestment 848 3,744 (2,177) (961)Totalinvestmentrevenue 256,890 244,973 249,890 238,797 Otherrevenue Salesrevenue 301,713 295,977 - -Otherrevenue 20,128 10,301 3,272 2,407 321,841 306,278 3,272 2,407 Contributionsrevenue Contributionsfromemployersandmembers 317,272 303,518 317,272 303,518 896,003 854,769 570,434 544,722

Benefitspaidandexpensesincurred

AirtimeandPSTNcharges 35,965 34,320 - -Benefitspaid 444,942 309,509 444,942 309,509Depreciationandamortisation 63,275 63,358 1,772 1,538Investmentexpenses 2,475 2,288 2,475 2,288Equipmentandancillarycharges 30,395 31,526 - -Interestexpense 8,697 6,466 - -Administrativeandotherexpenses 163,523 137,041 5,689 (11,225)Totalexpensesandbenefitspaid 749,272 584,508 454,878 302,110Shareoflossofassociates (43) - - -Changeinnetassetsfortheyearbeforeincometax 146,688 270,261 115,556 242,612Incometaxexpense 14,759 17,791 - -Changeinnetassetsfortheyearafterincometax 131,929 252,470 115,556 242,612Noncontrollinginterest (23,076) (15,983) - - 108,853 236,487 115,556 242,612Netassetsavailabletopaybenefitsatthebeginningoftheyear 3,785,856 3,551,495 3,768,383 3,525,771Acquisition/transferofnon–controllinginterest - (2,522) - -(Decrease)/increaseinavailableforsalereserve (80) 311 - -Others (5) 85 - -Netassetsavailabletopaybenefitsattheendoftheyear 3,894,624 3,785,856 3,883,939 3,768,383

Statements of Changes in Net AssetsFiji National Provident Fund and its Subsidiaries

For the year ended 30 June 2012

SUMMARY OF MEMbER WiThdRAWALS FY2008-2012

GROUNdS OF WiThdRAWALS 2008 2009 2010 2011 201255yearsandover($millions) 58.0 75.4 86.9 120.7 117.5Death($millions) 12.3 12.5 11.6 10.7 15.1Disability($millions) 4.3 2.3 2.4 3.6 3.5Migration($millions) 33.3 39.8 24.7 31.9 37.8Marriage($millions) 1.0 2.0 1.0 0.0 0.0Non-Citizensmigrating($millions) 7.4 6.3 5.6 5.1 6.5Partial($millions) 97.0 135.7 61.7 45.2 45.5Housingtransfers($millions) 36.1 30.6 29.1 33.3 40.2SpecialDeathBenefit($millions) 8.1 6.3 8.7 9.8 8.7

SUMMARY OF KEY iNdiCATORS FY2008-2012 2008 2009 2010 2011 2012Employers 6,701 6,944 7,105 7,508 7,840Membership 352,358 357,662 364,717 368,186 372,831Members’Funds($billions) 2.6 2.7 2.8 3.0 3.2Contributions($millions) 281.7 288.5 292.3 303.5 317.3Interestpaidtomembers($millions) 131.1 113.6 121.2 133.6 132.8InterestratecreditedtoMembers(%) 6% 5% 5% 5.25% 5%Withdrawals($millions) 297.7 352.3 277.5 309.5 318.3InvestmentPortfolio($billions) 3.1 3.2 3.4 3.5 3.5Annuitypayments($millions) 41.2 43.4 46.8 49.1 43.2InvestmentIncome($millions) 194.0 227.4 219.5 238.8 249.9TotalAssets($billions) 3.5 3.3 3.5 3.8 3.9

EXTRACT OF CEO’S REPORT

Pension ReformThe restructure of the Pension Scheme dominated our reform activities for the year. As at 30 June 2011, total liabilities for the 11,000 pensioners amounted to $565 million compared with $312 million set aside for pensions. The shortfall in pension income against pension payment meant that investment returns on current members’ savings were used to pay for this difference, as shown in the graph below.

The new scheme has addressed this with the adoption of actuarially fair age-based pension conversion rates. To effect the new scheme, the old pension business was terminated. Existing pensioners were provided the opportunity to re-exercise their pension options based on their initial pensionable amounts.

These options included life pension and term annuity products under the new scheme, and lump sum withdrawals. To mitigate the impact of the adjusted life pension rates, the Fund offered top-ups to those who opted for full life pension.

Pension ChoicesOf the 10,113 validated pensioners, 6,875 opted to reinvest $168 million into the Fund’s new scheme, whilst 3,223 pensioners exited through lump sum withdrawals. The Fund had set aside $57 million for top-ups. For those who qualified for this, 1,450 received a higher monthly pension capped at $100 per month, 2,820 continued to receive the same monthly pension as in the old scheme and only 15 pensioners suffered a reduction in pension by more than 50 per cent.

Structural ReformsThe implementation of other provisions of the Decree is in progress and to be completed by 2014. Apart from the Pension reform, some of the key changes that will affect members include:

l The establishment of two accounts for all members – the Preserved account will comprise 70 per cent of member’s balance, which will be set aside for retirement; and the other 30 per cent will be assigned to the General account, which members can access for pre-retirement withdrawals on approved grounds. First time property buyers can acess the Preserved account to purchase their home/land. The two accounts will be implemented in 2014.

l Uncapped Contributions from members – Members wishing to contribute more than the mandatory 8 per cent contributions, can do so to accumulate more savings for a meaningful retirement.

l A new age limit for Voluntary members – To encourage the accumulation of savings for retirement, the age limit for voluntary members has been reduced from 16 to 6 years old from 2013.

Investment Rehabilitation The Fund continued its investment rehabilitation reform with the following progress:

l Natadola Bay residential development – the Fund appointed a Project Manager, who is now undertaking development and market feasibility for the hotel’s residential lots.

l Momi – the Fund has entered into an Memorandum of Understanding and is now in contract negotiations with an international hotel operator. Legal and financial consultants have been engaged and a Project Management firm will be appointed to commence the development work. Construction work for this project is expected to start in mid-2013.

l Grand Pacific Hotel – the extensive reconstruction of this heritage site has commenced, with the hotel expected to open towards the end of 2013.

ICT ReformThe preparation for the ICT Reform continued during the year. As this is a major project, the Fund treaded carefully in choosing vendors to assist with the design of this wholly-integrated Members IT System. The newly established Project Management Office continues with refining key processes that will be automated by the new system.

Notable AchievementsDespite the challenges faced and lump sum payment of $126.7 million to pensioners, the Fund recorded a net surplus of $115.6 million. Other key highlights include:

• a steady growth in Investment income from $238.8 million in 2011 to $249.9 million, representing a 7.2 per cent Return on Investment (ROI).

• an increase in the Fund’s offshore investments to $212.3 million from $114.4 million, as we continued diversification of the investment portfolio.

• a 4.5 per cent growth in contributions to $317.3 million, reflecting strong enforcement and compliance; this, however, was offset by total withdrawals of $318.2 million, resulting in a negative net contribution of $0.9 million .

• a $4.8 million distribution to members affected by the flood early this year.

• a loan of $145.7 million advanced to Air Pacific – a strategic initiative to add-value to our investment in the tourism industry.

• the Fund, in partnership with NASFUND and Lamana Hotels of Papua New Guinea, commenced the re-development of the Grand Pacific Hotel, which is scheduled to open at the end of 2013.

Aisake Taito Chief Executive Officer

The financial year has been extensively engaging for the Fund, with the enactment of the FNPF Decree 2011 and the introduction

of the new Pension Scheme. Given the complexity and sensitivity of implementing these two critical reforms, wide consultation and proper planning were essential to ensure successful execution. Whilst there were some challenges, I am pleased with our achievements so far, as we continue on our reform journey to create value for our members and inspire confidence in the future of the Fund.

iNvESTMENT OvERviEW

ChAiRMAN’S REPORT

MAJOR hiGhLiGhTS FOR FY12

Interest credited to members on 30 June 2012, at 5% totaling

$132.8 million

Opening of new

Namaka Agency

Total Withdrawals to members (including pension and SDB) was

$318.3 million, an increase of

$8.7million from last year

Implementation new FNPF

Pension Scheme

Member’s balance totaled

$3.2 billion from $3.0 billion

last year

Total investment income was

$249.9 million in 2012

Fund’s membership

increased by 4,645 to 372,831

TotalContributions collected was

$317.3 million, from $303.5 million

in 2011

Net Contribution-$0.9 Million