Pension Reform in Fiji: Issues of Equity

and Fairness

By

Dr. Mahendra Reddy,

Dean, College of Business, Hospitality and Tourism
Studies,
Fiji National University.
 INTRODUCTION

 Pensions in the Pay-as-you-go system is an

important component of an employees wage.
 Wage is not only money wage but all the benefits
that he or she is entitled to as a result of
employment.
 Pensions is the non-wage component of the total
wage aimed at providing social security to the
employee when he or she is unable to earn regular
income.
 Introduction

 Given that pension contribution is held by a

separate the social security institution, how it is
kept, the investment plans, the annuity rates with
respect to changing economic and demographic
status of the country determine the viability and
sustainability of the pension schemes.
 Introduction

 In this regard, reforming of pensions has been a

global issue and has been undertaken on a regular
basis around the global.
 The need to reform pensions arises out of the
concern on the sustainability of the existing schemes
given declining fertility levels and improvements in
life expectancies.
 Introduction

 The society consists of two generations, the working

population and the retired population.
 Pensions Pension schemes are usually financed on a
pay-as-you go (PYGO) basis, by transfers from the
working population, and their employers, to the
retired population.
 These transfers will become increasing onerous as
the population ages thus raising the question of
sustainability.
 Issues

 Pension indexing;
 Ability to engage in portfolio re-adjustment
 Welfare losses from Compulsion in
Superannuation
 Unsustainable pension rates and Intergenerational
Equity
 Establishment of a Legally Defined Minimum
Pension
 Role of Complementary Pension Schemes
 Inequity in other Pension Options
 A. Pension Indexing

 It is important to protect pensions from inflation.

 This can be achieved by indexing of pensions to the
country’s Consumer Price Index.
 B. Ability to engage in portfolio re-
adjustment
 The system provides that all contributions must be
fully vested ( fully attributed to member) and all
balances are fully preserved to the member (cannot
be removed from the system until retirement age is
reached.
 B. Ability to engage in portfolio re-
adjustment

 Thus superannuation balances are illiquid and

unmarketable assets with a long term to maturity.
 Employees cannot, in general engage in portability of
accumulated balances. Proposed changes should
include a two tier savings, say 70% illiquid and 30%
liquid.
 Welfare losses from Compulsion in
Superannuation
 Direct welfare losses occur because some people
would prefer to contribute less of their earning to
superannuation than is required under compulsion
and would prefer higher current consumption in
order to acquire greater amount of non-
superannuation assets.
 Welfare losses from Compulsion in
Superannuation
 A preference for a lower level of superannuation may be a
rational economic decision based on particular
preferences and life circumstances.
 Factors which will affect individual choice are:
 level of salary of individuals and households;
 household size;
 household income; and,
 possibility of inheritances.
Some people might prefer not to defer consumption until
retirement such as low income workers, part-time
workers or casuals.
 D. Unsustainable pension rates and
Intergenerational Equity
 Pension rates which can exhaust the total members
contributions and draws from the contributions of
the working generation creates the most serious
nature of inequity amongst the two generations.
 The relative improvishment amongst the two
generations will be substantial as the pensions will
inevitably consume resources produced by the
young.
 E. Establishment of a Legally
Defined Minimum Pension
 There may be workers who may not have a pension which
is able to meet the basic necessities of life.
 For those workers, who have, contributed for a defined
minimum period, say 20 years, but whose pension fund
upon reaching the retirement age is below the legally
defined “minimum pension”, a pension supplementation
could be provided.
 This supplementation could be provided by well to do
pensioners or from returns on the investment of the fund.
 F. Role of Complementary Pension
Schemes

 The fund could allow opening up and setting up of

occupational pension schemes established by
employers for their employees.
 Complementary pension schemes may be funded,
internally or externally or as pay-as-you-go with the
benefits defined and contributions defined, limited
to employees of an industry.
G. Inequity in other Pension Options

 In some countries, pension is provided on the

basis of salary earned in the final stages of
working life.
 Given that salaries generally increase over time,
the payout will be on the higher side thus the
benefits will exceed the accumulated savings.
 This again will make the pension fund
unsustainable and thus deny the working
generation a security at old age.
THANK YOU