The conversion of the provident fund to a pension fund has raised serious questions about the intrinsic benefit to be derived by the individual worker. Sceptics say they would rather have their cake and eat it than have it in peace meal, while its value depreciates over time. Meanwhile the Eswatini National Provident Fund ENPF) has articulated the benefits of all workers having access to a pension fund to empower them in the long-term. Times of Eswatini Political Editor Timothy Simelane spoke to the ENPF Chief Executive Officer Futhi Tembe and asked pertinent questions on the conversion.
TIMES: Some people say the conversion does not have any intrinsic monetary benefit to the members because the pension payment is minuscule when divided according to the years to be lived. Whatever they would earn per month will also be decimated by inflation, interest rates, etc. The argument that has risen is that if they were to be given their lump sum, they would invest it according to their own means and probably earn more rewards than the pension option. How can the ENPF argue against this notion as it prepares to effect the conversion.
TEMBE: National pension funds by nature, globally are intended to be a social protection floor. Social protection floors are designed to prevent or reduce poverty, vulnerability and social exclusion after retirement. The proposed fund for Eswatini aligns with this. When one analyses the pension benefits that will be paid by the proposed national pension fund, this should be based on the member’s insured earnings. The insured earnings are subject to the capping of the salary/wages upon which the contributions shall be calculated and not the member’s basic salary. The income replacement level should, therefore, be assessed based on the insured earnings and not the basic salary. The contributions collected during the working life will be invested (thus earning interest/ investment returns) to fund the post-retirement pension as determined by the conversion bill. The accrual rate is set up such that the post-retirement pensions are expected to maintain their real value over the life of a pensioner i.e. get CPI increases scheme is a defined benefit scheme and as such returns made will be used to fund current pensions and the increases on them. While it is possible for one to privately invest his monies and earn a higher return, based on the historical data on the provident fund, it has shown the opposite to be true, many lack the financial literacy, knowledge, or time to manage their savings effectively. The national pension fund will serve as a safety net, ensuring that all members receive a steady income in retirement, which can help to alleviate poverty and reduce reliance on social welfare.
Secondly, the argument regarding inflation and interest rates is valid, but it overlooks the long-term benefits of a well-managed pension fund. National pension funds typically invest in a diversified portfolio that can hedge against inflation over time. Moreover, they are structured to provide lifelong benefits, which means that members are protected against the risk of outliving their savings, a concern that is particularly relevant as life expectancy increases.
Additionally, the proposed pension fund is designed to be more than just a financial institution; it will play a crucial role in promoting social equity. By pooling resources and redistributing wealth, it will help to ensure that everyone, regardless of their individual financial acumen, has access to a dignified retirement. This aligns with broader international labor conversions, particularly conversion No. 102 (Social Security Minimum Standards) Conversion, 1952, Universal Declaration of Human Rights (1948) that aim to protect workers’ rights and promote fair wages and benefits, enhancing overall Societal well-being.
Finally, while the desire for immediate access to funds is understandable, it is important to consider the potential consequences of withdrawing lump sums, such an approach could lead to increased financial insecurity for many, as individuals may not have the discipline or knowledge to invest wisely over the long-term. The national pension fund will not only provide a reliable source of income but also foster a culture of saving and financial responsibility that benefits the society as a whole. Social security also implies looking at the vulnerable members of society. It is for this reason that the conversion will offer a spouse’s pension, which the current system does not. It is our view, and that of the actuary that the benefits are of acceptable standards globally. In summary, it is important to differentiate between a pension fund, meant to be a social protection and other types of savings and investments an individual can go for. Some of these savings can possibly offer benefits, but cannot last you a lifetime like a retirement fund. They are also designed for short term usage and saving goals whereas a pension fund is meant to be a net for after retirement.
TIMES: Please work on an employee who earns E7 000 per month and has been contributing to the ENPF for the past 20 years. Please demonstrate how much the employee will get a lump sum and how much he stands to earn per month after the conversion. Please also show us how much the employee would have taken home in the lump sum after the 20 years.
TEMBE: On a defined benefit scheme, just like the proposed scheme, the investment returns have no bearing on the pension received. The pension received is as per the rules, not investment returns. Nonetheless, if someone earns E7 000 per month, his contributions will be capped at a salary ceiling of E3 700 per month, as is currently the case with the provident fund, making the individual no different from any other individual earning at least E3 700 per month (e.g. the results will be the same on the conversion to an individual earning E3 900 due to the salary ceiling coupon yield together with inflation based on the same return and real zero-coupon bond yield and an inflation risk premium of 0.5 per cent, with salaries assumed at CPI +1 per cent, one can calculate the following: Lump sum for any salary above E3 700 after 20 years at retirement = E433 521 (820 175 if the full E7 000 per month were to be insurable). These amounts are both nominal. Pension based on an accrual rate of 1.1 per cent = E926.76 per month (1 753.33 per month if the full E7 000 was insurable). These amounts are both on current money terms. Important to note is that the E3 700 represents social security (poverty protection) while the E7 000 will be expected to represents social security (poverty protection) while the E7 000 will be expected to represent salary replacement (standard of life maintenance). The quoted pensions also make an allowance of a reversion of 50 per cent in the event the principal pensioner dies leaving a qualifying spouse behind.
TIMES: Was there a consultation on workers at grassroots level before the decision to convert was taken? If yes, can you make the reports available, especially with the attendance list?
TEMBE: Such a decision would never be taken without the appropriate consultations. As such it will be recalled that just last year there was a headline in the Times of Eswatini with the conversion being one of the union resolutions to support.
TIMES: Has the ENPF considered leaving the provident fund as is and establishing a pension fund in which people will join on their own volition?
TEMBE: In response to whether the provident fund has considered leaving the provident fund as is and establishing a voluntary pension fund, it is important to highlight the implications of labour practices and international labour requirements related to social security. International labour standards, particularly those set by the International Labour Organization (ILO), emphasise the right to social security as a fundamental aspect of workers’ rights. These standards advocate for systems that provide adequate protection against various risks, including old age, disability and unemployment. Worldwide national provident funds have been converted to national pension funds to address the issue of abject poverty, and they are mandatory in nature. Governments want to offer social security to their citizens. The attitude of the government of Eswatini is not different. The conversion of the ENPF is one of the vehicles to achieve that. The current ENPF does not offer such. The lump sums received do not last on the individuals’ hand, leading to many being a burden to the state via the state old age grants.
TIMES: Has the ENPF considered calculating how much a member is entitled to in in the investment portfolios, so that after cashing out the provident fund, he still enjoys proceeds from the rest of the fund’s investment returns? This question is borne out of the presumption that members are not getting a return in investment, especially after reaching retirement and cashing out.
TEMBE: The question of whether a provident fund has considered calculating members’ entitlements in investment portfolios is an important one, particularly as it touches on how members perceive their returns upon cashing out. Understanding how provident funds operate can clarify this matter. Provident funds are designed to accumulate contributions from members, which are then invested to generate returns over time. When a member reaches the qualifying age and decides to cash out, they receive their share of the investment returns based on their contributions and the investment performance of the fund. This is where the conversation about the need for a pension fund becomes relevant. Unlike a provident fund, which typically provides a lump sum payout at retirement, a pension fund is structured to offer regular income throughout retirement life. This ensures that members can enjoy a steady stream of income, which can mitigate the risks associated with cashing out a lump sum. It is, therefore, the practice of the ENPF to declare returns on an annual basis, based on the following: Actual investment returns achieved during the year. And as per the SNPF Order, the fund is required to pay not less than 3 per cent despite negative returns in the environments.
