pension – Minivan News

Legal restrictions a challenge to investment expansion: Pension Office

The Maldives Pension Administration Office (MPAO) has said legal restrictions are preventing the expansion of investments into profitable industries such as real estate.

The MPAO cannot invest in real estate as none are currently listed securities at the Maldives Stock Exchange, the only registered stock exchange in the country, said CEO Mohamed Hussain Manik.

The Maldives Pension Act states that pension assets can only be invested in securities listed at a licensed stock exchange in the Maldives.

Manik said the office was currently in the process of identifying reliable and secure investments at technical level. Based on the findings of this work, the MPAO will consider expansion, but it may require amendments to the law, he added.

In order to prepare for the future plans for expansion, the MPAO recently held an investment seminar targeting the finance sector as well as a finance forum to discuss international finance and capital markets.

While the Pension Act details many conditions which should be considered when investing from the fund – such as minimum risk and maximum returns for the beneficiaries of the scheme – it also stresses diversification of investments.

According to the office, the annual return from current investments are on average at 7 – 8 percent with the fund expected to reach an estimated MVR3 billion by September or October this year.

In a press statement, the office has said that, considering the current inflation rates, this return is profitable for the beneficiaries for the scheme.

It was highlighted, however, that in order to sustain the increasing returns as the fund grows in size, they may have to take advantage of more investment opportunities both in the Maldives and abroad.

Statistics from April 2014 indicate that nearly 83 percent of the fund’s investment portfolio goes into government treasury bills which, according to the office, is also the most profitable due to high interest rates caused by increasing government debt.

Only 7 percent of it is invested in domestic equity and less than seven percent in fixed deposits.

Earlier this month the Capital Market Development Authority (CMDA) – an independent institution set up to develop and regulate the capital market and pension industry – said market development had not kept pace with pension development.

Speaking to Minivan News, CEO of the authority Fathimath Shafeega highlighted the importance of diversification and seeking profitable alternative investments for the pension fund, beyond the limitations of the Pension Act.

She also said that, following CMDA recommendations, the government – which holds a majority in the newly inaugurated parliament – is planning to introduce amendments to the Pension Act.

Beginning in March this year, the government more than doubled the monthly basic pension – with all citizens aged over 65 now receiving MVR5,000.

The basic pension, to which all retirement-age citizens are entitled, is still MVR 2,300 per month while the additional MVR2,700 is provided from the state budget by the Ministry of Finance and Treasury.

With an estimated 17,000 pensioners, the government had allocated MVR470 million (US$30.5 million) in the state budget to give out an MVR2,300 (US$149) in cash handouts.

At the time, the head of the cabinet’s economic council Ahmed Adeeb said that “innovative” methods, such as investing in the pension fund or government T-bills would prevent the need to divert funds from within the state budget. The MPAO has, however, said that no such arrangements have yet been made with regard to the basic pension.

The MPAO investments are currently made only for the Maldives Retirement Pension Scheme (MRPS) beneficiaries, a defined contribution scheme which requires both employer and employees to contribute seven percent (total fourteen percent) of the pensionable wage.

Under the plan, pension benefit payout at retirement will depend on the amount contributed and investment returns. It is mandatory for all Maldivian contract employees but voluntary for foreign employees.

Currently, MRPS beneficiaries will also receive a minimum of MVR5,000 if their payout is smaller than this amount.

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Maldives “ideally placed” to be international financial centre, says CMDA chief

CEO of the Capital Market Development Authority (CMDA) Fathimath Shafeega believes the Maldives to be “ideally placed” to play the role of an international financial centre.

Describing the country as strategically well-placed, the head of the independent regulatory authority noted that the country’s nascent financial framework was both a weakness and a strength.

“We don’t have regulations hindering a lot of things,” noted Shafeega. “We can start from a clean slate.”

“But parliament needs to be very much involved in it. We might need to provide the software – laws and regulations and other policy frameworks – while investors can bring the hardware.”

Senior members of both the previous and the current administration have considered the development of offshore banking services as a way to diversify an economy heavily reliant on tourism.

“It’s very much still on the agenda,” said Shafeega.

Shafeega spoke with Minivan News following the release of the CMDA’s first quarterly report in 2014, which revealed the authority’s work this year had focused on drafting legislation to further modernise the market, as well as amending the Corporate Governance Code in order to increase gender diversity on the boards of publicly listed companies.

Islamic Finance

Established by the Maldives Securites Act in 2006, the CMDA’s quarterly report for the first time included details of the Islamic Capital Market – an area the report describes as having an “ever-green future in the Maldives”.

Indeed, Shafeega argued that the successful establishment of an Islamic Capital Market – featuring Shariah compliant financial products – would also add to the Maldives appeal as a future financial hub.

Introducing the quarterly update on the Islamic Capital Market development, Deputy Islamic Minister Dr Aishath Muneeza, argued that there was now a “global movement towards the creation of financial transactions based on underlying activities or underlying assets.”

“Relying on real economic activities has been the success secret of Islamic finance and now we are being forced to find innovative ways to adopt this method,” said Dr Muneeza.

Under Islamic Shariah, any risk-free or guaranteed rate of return on a loan or investment is considered riba, which is prohibited in Islam.

Also chair of the Capital Market Shariáh Advisory Council (CMSAC), Dr Muneeza this quarter became the first person granted Shariah advisor registration status in the Maldives.

CMSAC was created in December 2013 in order to advise the CMDA on the development of an independent Islamic Capital Market.

The council’s activities this quarter included the formulation of a five year plan to increase the availability of Shariah compliant services, raise awareness of Islamic finance, and establish an Islamic Finance Centre in the Maldives.

Writing for the Islamic Finance News website in March, Dr Muneeza described Islamic Finance as “spreading like wildfire” since the introduction of Islamic banking and capital market services in 2011.

“It is hoped that in the upcoming years the Maldives can be used as a global case study to prove the success of Islamic finance,” she wrote.

Pensions

Shafeega also expressed confidence that the state pension fund – for which the CMDA plays a supervisory role – can soon successfully diversify its investment portfolio.

“As you know the pension system in Maldives has assumed that there will be a developed capital market. The development of the capital market has not kept pace with the pension development.”

Beginning in March this year, the government more than doubled the monthly pension – with individuals aged over 65 now receiving MVR5000.

The government had allocated MVR470 million (US$30.5 million) in the state budget to give out an MVR2,300 (US$149) in cash handouts, with head of the Cabinet’s Economic Council Ahmed Adeeb stating that “innovative” investment would prevent the need to divert funds from within the current budget.

The CMDA quarterly report noted that research had been carried out in order to ascertain potential avenues for investment beyond government or listed securities – the only options currently utilised.

“For the pension fund to be able to generate a good return for the members, we need to diversify the pension investment,” Shafeega told Minivan News.

“We need to find alternative investment that can generate a good return”

Shafeega also expressed confidence that the additional revenue could be realised, revealing that – following the authority’s recommendations – the government was planning to introduce changes to the Pensions Act during the 18th Majlis.

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Foreigners removed from pension scheme as voluntary amendment is passed

Following the passing of the second amendment to the pension act at the parliament yesterday, the Maldives Pension Administration Office (MPAO) has said that foreign employee participation in the pension scheme is now voluntary.

In a statement issued yesterday, the office said that employers are now permitted to delay the foreign employee pension contribution for the month of May.

Quoting Ismail Sujau, a director at MPAO, Sun Online has reported that the office has decided not to collect from those who are registered with the scheme this month as a lot of people have already started withdrawing from the scheme after it was made voluntary.

As of April, a total 3854 foreign employees have registered with the retirement pension scheme, reported Sun.

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Amendment overturns mandatory enrolment of foreigners in pension scheme passed

The People’s Majlis has passed a bill to overturn the mandatory enrolment of expatriate workers in the pension scheme.

This amendment to the Pension Act was passed with 37 votes in favour, 7 votes against, and 7 abstentions, according to local media Sun Online.

The proposed amendment – submitted last month by Maavah MP Abdul Aziz Jamaal Abubakr – was welcomed by many expatriates who fear they will struggle to reclaim their contributions upon leaving the Maldives.

Article 12 of the Maldives Pension Act requires employers to enrol all employees, Maldivians and expatriates alike, in the retirement pension scheme. This requires employers to pay 7 percent of their salaries to the government pension fund.

The amendment bill argues that the majority of expatriate workers will move overseas to retire, defeating the purpose of the scheme. It will be enforced from the day it is ratified by the president and published in the government gazette, reported Sun.

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Bill proposed to raise disability benefits to MVR5,000 a month

MP Ibrahim Muttalib has submitted an amendment to the Disabilities Act to raise the monthly allowance provided to persons with special needs from MVR2,000 (US$150) to MVR5,000 (US$324).

The MP for Fares-Maathoda – who failed to win re-election in last month’s polls – stated in the draft legislation (Dhivehi) that its purpose was to provide financial assistance to families with persons with special needs to seek medical treatment overseas.

While treatment for disabled persons was covered in the government’s ‘Aasandha’ health insurance scheme, Muttalib stated that securing Aasandha in hospitals abroad was difficult for families.

The first reading of the bill took place at today’s sitting of parliament, after which the amendments will be tabled for a preliminary debate.

The Disabilities Act (Dhivehi) was passed in July 2010 to provide financial assistance and protect the rights of persons with special needs whilst a national registry was compiled in 2011 with more than 4,000 active members.

Citing a 2010 report by the Human Rights Commission of Maldives and the UNDP, the US State Department’s 2013 Human Rights Report on the Maldives noted that “most schools accepted only children with very limited to moderate disabilities and not those with more serious disabilities.”

“Children with disabilities had virtually no access or transition to secondary-level education. Only three psychiatrists, two of them foreign, worked in the country, and they primarily worked on drug rehabilitation. No mental health care was available in Male. There also was a lack of quality residential care,” the report stated.

State benefits

Meanwhile, in March, the government raised the old age pensions from MVR2,300 to MVR5,000 a month to fulfil a campaign pledge by President Abdulla Yameen and the ruling Progressive Party of Maldives.

While the government insists that enough funds to provide the increased benefits could be generated by investing in pension funds and financial instruments, critics have argued that, with a MVR1.3 billion (US$84.3 million) deficit budget, the move will plunge the country further into debt.

“These are loans, and taking loans is acceptable to invest in to increasing productivity. But this is not such an investment, this is something the government is spending. Eventually people will have to bear the burden of this,” former Economic Development Minister Mahmud Razee told Minivan News last month.

A World Bank report at the end of 2013 urged the government to reduce spending in order reduce the “unsustainable” public debt which currently stands at 81 percent of GDP, and could rise to 96 percent by 2015.

“Maldives is spending beyond its means and financing the budget risks affecting the real economy,” the report said.

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Pensions office performs U-turn on benefit increase

After initially reporting that the promised pension increase from MVR2300 to MVR5000 could not be done this month, the Maldives Pension Administration Office (MPAO) today confirmed that it is working to transfer the MVR5000 by tomorrow.

The CEO of the office had yesterday told Haveeru that it had not received the additional funds for the increase and that it would therefore transfer the current MVR2300, giving the rest when the government released additional funds.

“They are doing this to fulfill a government pledge. This has nothing to do with the pension fund. We will not increase it to MVR5000 by taking money from that fund. What we will do is transfer it when the government provide us with it,” Manik was quoted as saying.

The state funded pension for all citizen’s above the age of 65 was introduced in 2009 at MVR2,000, and was later increased to MVR2,300 through an amendment to pension legislation.

A further increase to MVR5000 – starting from March 2014 – was an election pledge of President Abdulla Yameen, though changes to the amount disbursed from the existing pension funds will require another amendment to the act.

Cabinet minister Ahmed Adeeb has recently assured that the increase would take place in March as promised, saying that it can be funded through a sustainable model based on long term bonds and T-bills.

Adeeb also talked about the prospect of combining various funds such as housing, health insurance, and pension funds into a single fund.

The government had already allocated MVR470 million (US$ 30.5 million) in the state budget for the MVR2,300 allowance (US$149). These funds will now be invested in the retirement pension fund or in financial instruments such as T-bills in order to generate the monthly MVR5000 stipend, Adeeb has said.

Following Manik’s comments yesterday, Adeeb told Haveeru that the delay was due to the first of the month falling on the weekend and “because it is a new allowance”.

Yesterday, MPAO CEO Manik stated that eighty percent of the pension funds are already being invested in T-bills sold by the government to finance the budget deficit, and that discussions with the government are underway to invest the rest of the funds in bonds.

While the government maintains this to be a sustainable model of financing the increase in pensions, critics have argued that, with a MVR1.3 billion (US$84.3 million) deficit budget, the move will plunge the country further into debt.

Last December, the central bank and regulator – the Maldives Monetary Authority – advised the state to pay all due treasury bills and treasury bonds and to turn existing short-term debts into long-term ones.

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Government pension plans reliant on MVR1 billion investment return

The cabinet’s economic committee has announced President Abdulla Yameen will hand out the promised MVR5000 (US$ 324) to an estimated 17,000 pensioners starting in March.

Tourism Minister Ahmed Adeeb told the media during a press conference this afternoon: “I announce the happy news that the elderly will receive MVR5000 instead of MVR2000 at the end of this month.”

The government had allocated MVR470 million (US$ 30.5 million) in the state budget to give out an MVR2,300 (US$ 149) in cash handouts to individuals over the age of 65. These funds will now be invested in the retirement pension fund or in financial instruments such as T-bills to generate the monthly MVR5000 stipend, Adeeb said.

The government will need to generate an ambitious MVR1 billion (US$64.9 million) from investments this year to sustain the venture.

Although the government has not yet begun investments to generate the additional income for pensions, it will begin disbursing MVR5000 at the end of February as it is “certain” the required funds can be generated through future investments.

In the meantime, money will be redirected from within existing budgetary resources using “innovative methods” to pay out the pension this month, Minister of Fisheries and Agriculture Mohamed Shainee told Minivan News.

“This will not require additional expenditure from the budget. This will be done through investments made outside of the budget,” Adeeb told the press today.

“When we invest in the pension fund, this allowance will be given out without any breaks in the next five years. Even in the worst-case scenario, we will be able to generate that money. We can do this without any issues,” he said.

The cabinet’s economic committee is to meet tomorrow to discuss the most viable method of investment, Shainee told Minivan News.

Former President Mohamed Nasheed introduced the old age pension in 2008, while President Yameen pledged to increase the pension during last year’s presidential election campaign. On assuming office, Yameen said the government would not give cash handouts, but would provide the promised money through an insurance scheme.

The People’s Majlis subsequently passed a record MVR17.95 billion (US$ 1.6 billion) budget for 2014 with a deficit of MVR1.3 billion (US$84.3 million).

The deficit is expected to grow after the People’s Majlis failed to approve revenue-raising measures as proposed by the Ministry of Finance and Treasury.

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Early withdrawal proposals “detrimental” to survival of pension scheme, regulator claims

Proposed amendments to the country’s pension system allowing workers to make early withdrawals from their retirement funds will compromise the entire scheme, the scheme’s regulatory body, the Capital Market Development Authority (CMDA), has warned.

CMDA Director General Mariyam Visam today told Minivan News that the proposed amendments to allow public and private sector staff to make early withdrawals from their pension schemes to cover costs of pilgrimages, home finance and starting businesses creates a “fundamental problem” that potentially could invalidate the program’s long-term sustainability.

The comments were made in response to Civil Service Commission (CSC) claims that a majority of public sector workers were in support of the proposed amendments to the Pension Act forwarded by Guraidhoo MP Ibrahim Riza – while also backing additional mechanisms for early withdrawals.

According to local media, the purposes by which early withdrawals could be made under the MP’s amendments include funding a Hajj pilgrimage, undertaking higher education, property building, seeking medical treatment abroad or establishing a businesses.

Sun Online has reported that the amendments would also allow individuals who had completed a contracted term or anyone elected to public office to withdraw funding to set up a business after their term was finished.

Low savings levels

CMDA Director General Visam said that the country’s pension system had been introduced in 2010 for public sector workers, with private sector employees being included in the scheme a year later.

With the system still “very new” to the Maldives, she claimed that the amount of savings available to the public would presently be very low, limiting payments that could be made at a time.

Visam claimed that any notion of allowing early withdrawals would create a “fundamental problem” for the future of Maldivian pensions, which requires long-term savings to help safeguard funds for the program.

“[Early withdrawals] serve to defeat the purpose of the whole system. By the time of retirement, a person is expected to have been making long-term savings so they will have decent benefits,” she said.

Visam added that a number of schemes were already in place in the Maldives to provide private funding opportunities for both private and public sector workers, while social security systems such as Aasandha were also available to cover medical costs at home or abroad.

She said that allowing for early withdrawals for these reasons would serve to be “detrimental” to the pension scheme, which would itself be vital for funding future investments in various sectors like infrastructure and education.

Public sector support

Speaking to Minivan News today, CSC Media Officer Ali Nizar said that since the introduction of the pensions program in 2010, civil servants had been required to pay the bulk of funds into the system compared to the private sector.

Nizar added that with a new bill being proposed in parliament on withdrawals, the CSC had sought to find out the views of public sector workers in some 80 ministerial and council administrations on whether they would support the amendments.

The majority of civil servants surveyed not only approved of the bill, but according to the CSC, public sector workers favoured further provisions, such as bringing the age of retirement down to 55, as well as allowing early withdrawals in areas of major expenditure such as funding the Umra pilgrimage.

Back in June last year, the CMDA raised concerns that a previously proposed amendment to reduce the eligible age for a basic pension from 65 to 60 years of age could damage the country’s economy, potentially adding MVR138 million (US$8.9 million) to the state budget.

The reduction of the age of eligibility from 65 to 60 years old was at the time seen as potentially increasing the number of those eligible to receive monthly pension payments by 33 percent.

Previously released UN figures estimate that the number of Maldivians over the age of 60 could be 25,000 by 2015. This could potentially leave the government with MVR690 million per year in pension payments compared with last year’s outlay of MVR420 million per year – an increase of 64 percent.

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Proposed pension amendment could add Rf138 million to budget

A proposed amendment to the Pensions Act which would bring down the eligible age for the basic pension may add Rf138million (US$8.9million) to the government’s annual budget.

The bill has been criticised by the Capital Market Development Authority (CMDA), the pension industry’s regulator, as potentially damaging the country.

The proposed amendment was introduced to the Majlis last year by Dhivehi Rayithunge Party (DRP) MP for Felidhoo constituency Yoosuf Naseem. It received its first reading in August 2011.

The reduction of the age of eligibility from 65 to 60 years old has the potential to increase the number of those eligible to receive the pension by 33 percent.

According to the most recent figures from the Maldives Pension Administration Office, 15224 people received the basic pension of Rf2300 in April. This represents an outlay of Rf35 million (US$2.2million) per month.

The Pensions Act stipulates that the costs for the provision and the administration of the Basic Pension Scheme be incorporated into the government’s budget.

The current budget deficit is estimated to be Rf9.1 billion (US$590million), or 27 percent of GDP.

“Soon there will be a vote to accept or not. If accepted it will go to committee for extra fine tuning. This process will take about two or three months,” Yoosuf explained.

Mariyam Visam, Director General of the CMDA, hoped that the Majlis’s members would examine the figures carefully before approving the amendment.

“Policy makers need to look into the figures before they make a decision,” said Visam.

Population figures from the United Nations’ Department of Social and Economic Affairs give the 2010 figures for Maldivians aged between 60-64 at 5000. The potential addition of this group to the pension scheme could add Rf11.5 million per month to the government’s obligations under the 2009 Pensions Act – potentially adding Rf138 million (US$8.9 million) per year.

These figures are similar to those anticipated by Yoosuf. Mariyam Visam, Director General of the CMDA, also agreed that up to 5000 people may be added to the scheme as a result of such an amendment, although she added that it would depend on those registered as well as on other eligibility criteria.

Yoosuf claimed that the current economic environment was more conducive to the passage of the bill than in the past.

“The passage of the bill is appropriate now because the economy is picking up,” he said, “although not as fast as we want.”

Conversely, Visam raised concerns over the detrimental economic impact of lowering the age for pension eligibility.

“The economic activity of people between 60 and 65 years may be affected if they are offered an incentive not to work.”

According to the Department of National Planning’s ‘Household Income and Expenditure Survey 2009-2010′, 38493 people (28 percent) were unemployed in 2010.

The report highlighted that between 2006 and 2010 unemployment had increased by 20,000 – an increase of over 100 percent.

The UN’s figures estimate that the number of Maldivians over the age of 60 could be 25000 by 2015. This could potentially leave the government with Rf690 million per year in pension payments compared with the current outlay of Rf420 million per year, an increase of 64 percent.

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