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“The Great FNPF Robbery” (FT 25/4/2020)

25/04/2020

The Great FNPF Robbery

Wadan.narsey@gmail.com

If a gang of thieves came in the middle of the night, tied up the householders and made off with one thousand dollars of their savings for retirement, the police would be after them, and if the gang was too powerful for the police, then even the military might be called in.

Except that in this case, even the police and the military are being “robbed” of their own FNPF savings, as well as all the employed people in Fiji, including civil servants, Members of Parliament and even the Prime Minister of Fiji.

I place the word “robbed” in inverted commas, because the 5% reduction of “employers’ contribution” to workers’ FNPF for nine months, has been done perfectly legally by the Bainimarama Government as part of its budget response to the COVID-19 crisis.

I find it terribly strange that workers’ representatives have not vehemently opposed this measure which is supposed to collectively cost them a massive $130 million, as I wrote about in my FT article two weeks ago.

Perhaps because the “theft” is from their retirement savings which are being accumulated for them, out of sight and out of mind by FNPF.

But I remind you of one of my favorite phrases from songs of the sixties, “you don’t know what you have got till it is gone”.

What the workers and their union representatives do not seem to appreciate is that this one time reduction will cost Fiji’s employees not just $130 million this year, as Minister for Economy Khaiyum has informed, but an even more massive $999 million in thirty five years, because of the stupendous power of the compound interest rates, currently well over 6% per annum, that FNPF earns on its investments portfolio.

This rate of return is far more than that given to us by the commercial banks for our fixed deposits, often barely over 1%.

This massive cut in workers’ retirement funds has been delivered free of charge to employers, at the stroke of a pen of the same Minister of Economy, Mr. Aiyaz Khaiyum, a lawyer by profession.

Although one can understand the incredible preoccupation in Fiji and globally with the coronavirus, why on earth are employees and their union representatives not protesting and putting a stop to this massive daylight “robbery”?

While FNPF management has been correctly pleading with the members not to withdraw even $1000 from their FNPF balances that Government is allowing them currently, they would strengthen their case much more if they explained simply to their members, how much such withdrawals today will cost their members over the long term such as in 35 years when today’s 21 year old will retire, because of the incredible power of compound interest rates (around 6%) that FNPF has been able to give annually and cumulatively to their members.

They should explain how this is far greater than what they receive from bank deposit rates of one and a half percent per annum, which often are less than the rate of inflation and which amounts to the savers losing the real value of their deposits every year.

They should also explain what an incredible amount ($999 millions or one billion dollars) they will have less in their investment portfolio  in thirty five years time because of the loss of $130 million today.

And indeed, taking the $80 million reduction in employee contributions, the total reduction of $210 million today will reduce their investment portfolio by roughly $1614 million (i.e. $1.6 BILLIONS) in thirty five years time.

Imagine how many profitable resorts etc. FNPF could have been owning in thirty five years time if these $210 millions had not been withdrawn from their accounts today!.

WOW.   WOW.  WOW.

But first, workers and trade unionists, must be absolutely clear on who exactly owns these FNPF contributions: the employees themselves, not employers or government.

Employees own “employers’ contributions”

It is possible that workers have not woken up to what has happened because of the terminology used for our FNPF contributions, with a false dichotomy between “Employee Contributions” and “Employer Contributions”.

But as I pointed out last week, both contributions come out of the wages and salary bill of the employer (including government and taxpayers) and go into the employee’s FNPF account, belonging to him or her forever .

FNPF contributions do not belong to the employers or to government. Only the employee can draw upon these contributions upon retirement or on special occasions.

Reducing these contributions, even for nine months as has been done by the Bainimarama Government currently, therefore reduces the FNPF balances of all current member for these nine months.

For example, for a person on a salary of $30,000 per year, the 5% reduction for nine months amounts to a reduction of $1,125 from their FNPF account, which is kept by the employer.

Had that $1,125 gone to the Member’s account as originally required and kept accumulating at the compound interest rate of around 6% per year, you will be amazed at what it becomes when you retire after 35 years.

The power of compound interest rate

Most people understand “simple interest rates” where $1000 will accumulate $60 every year, and the total will become $3100 after thirty five years.

But at “compound interest rates”, which is interest paid also on accumulating interest as well as principal, that original $1,00 will become:

1000*1.06*1.06* (keep going for another 33 times)  = $7,686.

To drive home the message to readers, I show in Graph 1 what a moderate ten thousand dollars ($10,000) saved by a twenty year old FNPF Member today, becomes after ten, twenty, thirty and thirty five years’ time, if it is not drawn upon at all.

FNPF 1

Because of the incredible power of compound interest rate of just 6% per annum, that $10,000 left with FNPF today, would accumulate to a massive $76,861 in thirty five years time, when the member retires.

This might be around the cost of a basic comfortable rural house.

In the same graph, I give in contrast what this same $10,000 becomes if left in term deposits in commercial banks at one and a half percent compound interest rate: a mere $16839, perhaps the cost of one room in a simple house.

Students might like to do this exercise on their calculators or excel spreadsheets.

FNPF ads

These same arguments of course apply to the $1,000 withdrawal that the Bainimarama Government is allowing FNPF Members today.

What FNPF ought to point out to their members is that if left intact with the FNPF, the Member would be able to enjoy a far greater $7,686 in thirty five years time, for their retirement.

That is the “real opportunity cost” of their withdrawing and consuming that $1,000 today.

They should point out to the Members that FNPF will have $999 million less in their portfolio of investments in 35 years time because they are losing $130 million today.

If FNPF Members cannot understand what I write above, they should ask their secondary school students to explain it to them, and follow the FNPF advice:  leave your FNPF balances alone.

What about the $130 million?

Over the last fifty years, union leaders have rightly fought tooth and nail to protect their members’ real incomes, often receiving the assistance of progressive academics.

Some union leaders (and former ones) might remember the massive battles that were waged more than thirty five years ago by unions and some academics against the Alliance Government’s Wage Freeze of all workers’ incomes, which would have reduced their real incomes because of rampant inflation.

One young USP economist (and Fiji Times) then lent them a hand in their battles (read my Fiji Times article of 2 February 1985 “Alternatives to the unilateral wage freeze”) which tried to explain why the blunt wage freeze imposed by Government was not just hurting the workers but it was not a sensible policy given the government’s own development objectives.

Those battles led to the formation of the Fiji Labour Party (of which I was briefly its Policy Chairman until a foreign “adviser” snuck in) and its subsequent victory at the 1987 elections unfortunately soon aborted by the 1987 coup.

Two weeks ago, I tried to point out that the Bainimarama Government reducing Employers’ FNPF contributions by 5 percentage points from 10% to 5% was effectively taking a massive $130 million from workers’ pockets and placing this huge sum in employers’ accounts.

This $130 million is not a piddling sum and I expected today’s unionists to be up in arms about it, but apparently it has not registered with them what a huge sum it is, potentially into the future.

I give Graph 2 here which explains what this $130 million would have amounted to in thirty five years’ time, in Members’ own accounts, a gigantic $999 million (almost a billion), had it not been removed by a stroke of the pen of the Minister for Economy.

FNPF 2

This is far more than the $200 million lost by Fiji in the NBF disaster, even taking inflation into account.

This massive sum of FNPF money is being lost by Fiji’s workers which include civil servants (including police, army, parliamentarians and Prime Minister) which benefits taxpayers in general.

But a large part is also being lost by private sector employees, going straight into the pockets of private sector employers who are all keeping quiet, including those sitting on the FNPF Board.

But why are union representatives quiet?

The Australia example

Fiji’s union representatives might wish to examine closely the strategies used by the Australian Government to help deal with the coronavirus.

The Morrison Government has basically placed the bulk of the burden on taxpayers in general by guaranteeing the payment of basic living allowances for Job-Keepers (for employees who might have been laid off) and Job-Seekers’ Allowance per fortnight for unemployed people.

The bulk of the debate here has been about casuals and workers on temporary work visas.

The Australian Government did not touch workers superannuation contributions as the Bainimarama Government in Fiji is unfortunately doing.

While the Australian Government is also allowing some workers to draw on their super funds, there is huge public campaign against using this measure, precisely because of the impact on poor elderly retirees who will not have enough upon retirement. But at least here, they have the state pension and the dole.

Are Fiji’s union leaders asleep?

Or do they, like the average person in Fiji, get worked up about some $1,000 being squandered by some Prime Minister in home renovations, but they simply cannot comprehend large sums like $999 million being taken away from workers, at the stroke of a pen by the Minister of Economy.

There is a “Murphy’s Law” that comes close to explaining this: people accept huge numbers they cannot comprehend or confirm or deny, but quibble over petty cash.

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