IMF Labels FNPF Reforms A Success

The International Monetary Fund has concluded that the reforms undertaken by the Fiji National Provident Fund have been effective in stabilising the cash flows into the Fund. It said this
02 Jul 2016 08:04

The International Monetary Fund has concluded that the reforms undertaken by the Fiji National Provident Fund have been effective in stabilising the cash flows into the Fund.

It said this is due, no doubt, to the reduction of the grounds on which contributors can access their accounts before retirement.

The IMF further emphasised the reforms have been beneficial in making operations easier to understand and manage from both a financial and operational aspect. The findings have been highlighted in a report just released by the IMF where it carried out a Review of FNPF’s Reforms progress.

This latest IMF report reaffirmed the success of the reforms in terms of the separation of accounts, restructure of the pension business and the streamlining of withdrawal facilities.

The Fund underwent significant reforms in 2012 consistent with the requirements of the 2011 Decree.

There were two main reasons for the reform – the sustainability of the Fund and its cash position.

In contrast, the IMF said a recent review of another country showed how the Government inadvertently bankrupted a fund by failing to allow the trustees, on social grounds, to adjust downwards the pensions of new retirees in a climate of declining interest rates.

It, however, stressed, there is no indication of either the failure of the Board to act or the Government to interfere in Fiji.

Following the review, the IMF has made a number of recommendations in order for the Fund to continue building on the momentum.

FNPF chief operating officer, Jaoji Koroi, said: “I am pleased to report that FNPF is on track to implementing the International Monetary Fund’s recommendations.”



The IMF’s recommendations were in five key areas three of which have been completed already by FNPF with the remaining two in progress.

It suggested seperation of accounts whereby the Retirement Income Fund was to be established as a seperate pension fund and manage the pension business seperately from active workers contribution fund.

The IMF recommended the restructure of the annuity business which is now completed as well as streamlining of withdrawal facilities.

Recommendations in progress are International Asset Diversification and Demonopolisation of compulsory retirement savings.

The IMF recommended the most effective and efficient way of ensuring reasonable long-term returns to members by adding growth assets was through diversifying the portfolio of equities internationally. This is currently in progress.

“The capital markets in large international economies are significantly better diversified across all industrial sectors,” it said.

“They are more liquid; there are more primary and secondary issuances and a materially higher equity premium when compared with the local market.”

The IMF said the fact the local currency is pegged to a basket of international currencies presents an opportunity to diversify the portfolio internationally with minimum currency risk.

This is by having an international portfolio that largely replicates the basket of currencies to which the local currency is pegged.



The IMF however, emphasised the present ad hoc approach to gaining exposures to international markets is constrained by having to seek the approval of the Reserve Bank for these exposures.

“While this is understandable from a macroeconomic perspective, the policy does not allow FNPF to diversify its equity exposures adequately and lessens the future replacement rates for contributors through lower potential earnings,” it said.

“Experience in other countries where the investment function is subject to regulation as opposed to being based on “prudent person” principles is that setting too low an exposure limit or approving exposures on a case-by-case basis for international assets is not effective.

“Pension funds, in these circumstances do not develop the internal processes to manage the exposures properly and do not build the relationships with international fund managers that are necessary.

“It is common to see, in many countries where the pension fund sector is very large in relation to domestic capital markets, foreign equity exposure limits as high as 20% of funds under management.”

The IMF suggested an effective, efficient and relatively low cost strategy for increasing the exposure to growth assets is to purchase Exchange Traded Funds based on the stock exchange indices in the economies forming the basket of currencies to which the local currency is pegged.

This strategy would reduce the country risk inherent in the present portfolio, diversify the equity holdings across both different market and industry segments.

This would be while maintaining manageable currency risk and, as these securities are readily tradable, not impose additional liquidity risk.



Meanwhile, the IMF said its conclusion was based on a subjective view against normal risk elements present in the operations of pension funds, FNPF is a low risk operation.

“The major risk confronting FNPF is investment risk in the sense that it is likely that FNPF will continue to grow faster than the capital market in Fiji,” it said.

“It will suffer from a shortage of opportunities to add growth assets to its investment portfolio.”

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