equitable and fair_ dr mahendra reddy

8/6/2019 Equitable and Fair_ Dr Mahendra Reddy

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Pension Reform in Fiji: Issues of Equityand Fairness

By

Dr. Mahendra Reddy,

Dean, College of Business, Hospitality and TourismStudies,

Fiji National University.


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INTRODUCTION

Pensions in the Pay-as-you-go system is animportant 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 ofemployment.

Pensions is the non-wage component of the totalwage aimed at providing social security to the

employee when he or she is unable to earn regularincome.


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Introduction

Given that pension contribution is held by aseparate the social security institution, how it iskept, the investment plans, the annuity rates with

respect to changing economic and demographicstatus of the country determine the viability andsustainability of the pension schemes.


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Introduction

In this regard, reforming of pensions has been aglobal issue and has been undertaken on a regular

basis around the global.

The need to reform pensions arises out of theconcern on the sustainability of the existing schemesgiven declining fertility levels and improvements inlife expectancies.


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Introduction

The society consists of two generations, the workingpopulation and the retired population.

Pensions Pension schemes are usually financed on a

pay-as-you go (PYGO) basis, by transfers from theworking population, and their employers, to theretired population.

These transfers will become increasing onerous as

the population ages thus raising the question ofsustainability.


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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


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A. Pension Indexing

It is important to protect pensions from inflation.

This can be achieved by indexing of pensions to thecountrys Consumer Price Index.


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B. Ability to engage in portfolio re-adjustment

The system provides that all contributions must befully vested ( fully attributed to member) and all

balances are fully preserved to the member (cannotbe removed from the system until retirement age isreached.


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B. Ability to engage in portfolio re-adjustment

Thus superannuation balances are illiquid andunmarketable assets with a long term to maturity.

Employees cannot, in general engage in portability of

accumulated balances. Proposed changes shouldinclude a two tier savings, say 70% illiquid and 30%liquid.


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Welfare losses from Compulsion inSuperannuation

Direct welfare losses occur because some peoplewould prefer to contribute less of their earning tosuperannuation than is required under compulsionand would prefer higher current consumption inorder to acquire greater amount of non-superannuation assets.


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Welfare losses from Compulsion inSuperannuation

A preference for a lower level of superannuation may be arational economic decision based on particularpreferences 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 untilretirement such as low income workers, part-timeworkers or casuals.


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D. Unsustainable pension rates andIntergenerational Equity

Pension rates which can exhaust the total memberscontributions and draws from the contributions ofthe working generation creates the most seriousnature of inequity amongst the two generations.

The relative improvishment amongst the twogenerations will be substantial as the pensions willinevitably consume resources produced by the

young.


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E. Establishment of a LegallyDefined 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 definedminimum period, say 20 years, but whose pension fund

upon reaching the retirement age is below the legally defined minimum pension, a pension supplementationcould be provided.

This supplementation could be provided by well to do

pensioners or from returns on the investment of the fund.


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F. Role of Complementary PensionSchemes

The fund could allow opening up and setting up ofoccupational pension schemes established by employers for their employees.

Complementary pension schemes may be funded,internally or externally or as pay-as-you-go with thebenefits defined and contributions defined, limitedto employees of an industry.


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G. Inequity in other Pension Options

In some countries, pension is provided on thebasis 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 thebenefits will exceed the accumulated savings.

This again will make the pension fundunsustainable and thus deny the workinggeneration a security at old age.


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THANK YOU

equitable and fair_ dr mahendra reddy

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