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ENPF VOWS NOT TO COLLAPSE PSPF

07/05/2023 15:05:00 Welcome Dlamini

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MBABANE – A PSPF report on the conversion of ENPF into a pension scheme has got the former fearing for its collapse.

The Times SUNDAY has seen the report by the Public Service Pensions Fund (PSPF), through which it lists a number of issues that it believes would lead to its demise should the conversion of the Eswatini National Provident Fund (ENPF) into a national pension fund be implemented. However, the ENPF, after being approached by this publication with the contents of the report, responded to each of the issues raised therein and basically said there was nothing for PSPF to fear. For the past 10 years, the ENPF Conversion Bill, which seeks to bring about the change, has been stuck between Cabinet and Parliament. The PSPF believes that it would suffer ‘natural death’ as the fund would quickly run out of funds and eventually face serious financial challenges due to the following: Paying out benefits more than it receives contribution; selling assets (disinvesting) in order to meet the cost of promised benefits and administration of the scheme; and limited investment due to the lack of funds and constrained investment strategy. But the ENPF has allayed this fear, by stating that: “There will never be any natural death on PSPF, especially one caused by ENPF.”

The PSPF argues that in the last few years it has been facing liquidity challenges, wherein the current contributions are not sufficient to cover the benefits and expenses on an annual basis.
“A further reduction of the contributions (10 per cent to ENPF) will exacerbate the situation,” said the PSPF, further arguing that the contribution rate of 10 per cent payable to the new national pension scheme would be taken from the 20 per cent currently paid to the PSPF, that is, total contribution would reduce from 20 per cent to 10 per cent of payable salary.
Reacting to this, the ENPF pointed out that the contributions are 10 per cent of insured salary, not a member’s full earnings; and the maximum insured salary was currently E3 500 per month.

contribution

“The contributions to ENPF can, therefore, be no larger than E350 per month, based on current insured salary,” the ENPF counter argues PSPF and, after drawing up three scenarios based on three different salary scales, the remaining PSPF contribution is actually 85 per cent of the total contribution and not 10 per cent. The provident fund said what should be appreciated is that the PSPF is an occupational pension scheme just like the other pension funds in the country. “The national pension fund will act as a first tier in the social security system in the country, thus complementing the occupational pension schemes, inclusive of PSPF, and will provide an extra savings channel for workers to have more than one source at retirement,” said the ENPF. On the argument by PSPF that it had been facing liquidity challenges in the last few years, the ENPF said the former is what is actuarially termed a mature fund, therefore, it is not surprising that contributions are not sufficient to pay benefits and expenses. “A mature fund is expected to be generating sufficient cash flows from investment to improve liquidity. We would like to believe that this is how it has been able to manage its cash flows,” said the ENPF.

The provident fund made an example of the 2018 actuarial valuation of the Government Employees Pension Fund (GEPF), which is the pension fund of civil servants in South Africa, which is said to show that for a matured fund like the PSPF, the investments now play a critical part on the cash flows. “This goes to show that it means that PSPF is failing to manage its investments and as such is in the worse position. We will reiterate that 10 per cent is not what will be lost by PSPF. Their projections are thus incorrect. Any PSPF contribution paid to ENPF is no gift to ENPF. It is buying benefits for its members,” said the ENPF.

determined

It is also the argument of the PSPF that the benefits of the scheme were determined, taking into consideration that the employer committed to contributing 20 per cent to the scheme. “A reduction of the contribution rate would necessitate a reduction in the benefits payable. It has been actuarially determined that the benefits would reduce to 1/3 of the current contributions,” said the PSPF. A table drawn by the PSPF depicts a scenario where currently the death benefit is 24 months of basic salary yet under the new scheme it would be reduced to eight months of basic salary; where currently the lump sum benefit is two per cent of the full salary multiplied by 15 years of service, multiplied by 25 percent, which under the new scheme would be reduced to 0.6 per cent of full salary multiplied by five of service, multiplied by 8.3 per cent; where currently pension is calculated at two per cent of full salary multiplied by years of service, multiplied by 25 per cent, which under the new scheme would purportedly be reduced to 0.6 per cent of full salary multiplied by years of service multiplied by 25 per cent.

To this, the ENPF has noted that the current contribution to the PSPF is 20 per cent, and that if one were to assume that the incorrect allegation of 10 per cent reduction in contributions is correct, then one would expect the benefits to reduce by 50 per cent not 67 per cent as alleged. The ENPF noted that the table drawn by the PSPF defied logic and was not in accordance with PSPF rules as there seemed to be lack of understanding of the benefit structure of the PSPF. “The pension formula is not according to PSPF rules. Again, lack of understanding of their benefit structure. With this pension formula, PSPF will be in a very big surplus position,” said the ENPF. The provident fund said it was important to note that no individual would be worse off and this was also true even if proposed benefits were kept at this level with the PSPF joining, for example, on 20 year service, E10 000 salary, pension on PSPF would equal E4 000. “If joining ENPF at one per cent (rate without PSPF), pension is split as E3 000 (PSPF) plus E700 (ENPF), totalling E4 000. What should be emphasised is that the civil servants are to get benefits from two sources; PSPF and the national pension fund,” the ENPF outlined.

The provident fund said the PSPF was likely to have the most benefits from the mortality gains of social security, something that was even discussed during the meeting of actuaries. There is also another argument by the PSPF that it would have to make forced sales of its assets at inappropriate times in order to honour promised benefits, which may result in long wait for benefits to be paid. But the ENPF has said this cannot be true: “No PSPF assets will be transferred to ENPF. The status quo on how PSPF manage their cash flows will remain.” There is also an argument of constrained investments, where the PSPF is arguing that reduced contributions would lead to constrained investments strategy, lack of diversification, which would also affect the economy.

liability

In response, the ENPF has stated that an appropriate investment strategy is driven by an asset liability modelling, which would, among its output, project cash flow needs. “The move (conversion) will not constrain PSPF investment in any way. And it does not hold water that a reduction of the E350 contributed to the national pension scheme would adversely impact the PSPF to the extent that investments would be negatively impacted,” said the ENPF. The provident fund said the duty of the PSPF Board, investment committee and management is to continually devise various investment strategies to ensure that they meet the members’ expectations. “PSPF structures would have failed their members if they would hide behind the reduction of E350 to the national pension fund, as affecting ‘diversification of investments and affecting the economy...’ In fact positively looking at the dual contributions, the PSPF members would now be investing not in one basket, but in two, thus protection of their benefits,” stated the ENPF. What the PSPF has also argued on is that government will have two defined benefit funds (PSPF and ENPF) to finance (as sponsor and guarantor).

The PSPF’s view is that government might find itself having a substantial financial burden to meet the deficit positions of both schemes over time as both schemes may be in deficit. Rebutting this, the ENPF said at no point would government be expected to finance the national pension scheme and neither would any start-up capital be required. The ENPF said government would only be an overseer of the national pension fund because it would be a parastatal. “The ENPF in its defined contribution status, for all the 50 years it has been in existence, has never requested government to sponsor nor guarantee any financing. In fact over the years, the government has been assisted through the ENPF in financing national projects, such as the one that was managed by the Eswatini National Housing Board,” said the provident fund. It said robust investment strategies were very much key in the administering of pension funds, whether occupational or national. The ENPF said the PSPF would still remain the largest investor.

In its recommendations, the PSPF has called for its members to be exempted from joining the new national pension scheme, given that its current contribution rates and benefit level are much higher to those proposed under the ENPF. The PSPF’s proposal is that the new pension scheme should focus on employees who do not have a pension coverage at all, and not seek for duplicate benefits. “In addition, under the provident fund, public servants were exempt from contributing and membership. In Tanzania, the Public Service Pension Fund was exempted, and the National Pension Scheme focused on private schemes,” the PSPF has said in backing the recommendation. This though has been dismissed by the ENPF by arguing that the benefits are not higher and contributions must be looked at in relation to the benefits they promised, especially the actuarial soundness of them.

reduction

According to the ENPF, the claim of reduction in benefits to 0.6 per cent implies that PSPF contributions are currently not actuarially sound because one of have expected a reduction to one per cent if the contributions were actuarially sound. “Defined benefits are like insurance. You need numbers to reduce volatility. Tanzania has the numbers to exempt civil servants. Eswatini is a small country. The Seychelles is a good example of a country with a small population. More solidarity is needed,” the ENPF counter argued. The PSPF has also recommended that should their members be part of the new scheme, government should not reduce the current contributions made to the PSPF. The ENPF responded: “This is for government to decide. However, any monies paid to ENPF will pay a benefit to the contributors, not to the detriment of civil servants.” Another recommendation by the PSPF is that an in-depth consultation with stakeholders is necessary before any decision could be taken. But that the ENPF has stated that consultations were done with all stakeholders in the country, including the Labour Advisory Board (LAB), which is made up of government, workers and employers and which PSPF is part of.

“The LAB recommended the approval of the Bill for the process to proceed, hence the Bill is now considered at Cabinet level,” the ENPF has said. Moreover, the PSPF has recommended that shoud contributions under it be redirected to the ENPF, then government should fund the current deficit of E10 billion, and the benefits be reviewed to be in line with the contributions received. To this, the ENPF said the PSPF has run an actuarially higher deficit than this historically, but government has never paid any additional funds to its obligations, yet the deficit has actually improved to the current one. “A deficit needs a recovery plan. This does not mean immediate payment, unless a recovery plan cannot be found. If PSPF believes the State must pay the deficit, assumed for benefit security issues, benefit security will be improved under ENPF since it is starting from an fully funded position,” added the ENPF. The ENPF is of the standpoint that the PSPF has not given themselves time to understand the content of the conversion Bill, hence the allegedly gross misconceptions they have.