The Vanuatu National Provident Fund

November 20, 2024 4:15 am | Posted in Features | Share now TwitterFacebook

From ashes of the 1998 riots, the VNPF has emerged as the one of the most important financial institutions in Vanuatu. In June 2024, the VNPF published is 2023 Annual Report. This was an impressive improvement in the financial performance over past years when it had failed to produce timely Audited Financial Statements for past years. The Audit was conducted by Law Partners.

In 2023, collections were at their highest ever at VT 2.9 billion, with VT 25 million in surcharges. Total net assets stood at VT 24.8 billion, a 4.4 per cent increase compared to 2022 with total income generated of VT 2 billion, a 116 per cent increase compared to VT 937 million in 2022. The substantial increase was due to revaluation gains in equity investments. Total profit generated was VT 840 million, an increase of 243 per cent compared to VT 245 million in 2022. Out of these profits, VT451m was transferred to the member’s account representing a 2% increase in the member’s funds. The balance of the General Reserve had improved from the lows of negative VT646m in 2012, to a healthy VT803m at the end of 2023.

What the report has highlighted is the dramatic improvement in the performance of the fund and its investments since 2020. However, the fund has had its problems since it was established.

Background

The Vanuatu National Provident Fund (VNPF) is a mutual fund established in 1987 under the VNPF Act [CAP 189] as the country’s first social security system, to provide a safety net when workers reach retirement age and benefits to members through the management of their savings. It was given a mandate to receive funds from employers and employees and to invest those funds in to productive assets on behalf of its members.

It is compulsory for all employees in Vanuatu earning at least VT3,000 per month and aged between 14 and 55 years to be members of the Fund. Member and employer contributions are calculated on the monthly remuneration of an employee. The rate of contribution is 8% of the employee’s remuneration, of which 4% is from the employee’s monthly remuneration while 4% is contributed by the employer.

The VNPF has had its history of controversy. In 1998, there was rioting on the streets of Port Vila triggered by public anger over alleged misuse by politicians of the Vanuatu National Provident Fund. The riot caused a mass withdrawal of funds which brought the VNPF to its knees. It was at this time that Mr Ranjit Kanagasbai, a Sri-Lankan was recruited as General Manager in 1999 to revive the Fund and bring it back to normalcy. In 1998, VNPF was part of an ADB sponsored restructuring which saw significant numbers of the Funds non-performing loans and bad investments transferred to the Assets Management Unit. The reforms in the VNPF were implemented to minimize political interference. Since the reforms, the VNPF has grown and has assets currently valued at VT24.8b

How has the Fund Performed since its inception?

The VNPF is a mutual fund. It has no debt and receives contributions at the rate of between VT2.5-3B per year. The Managers of the fund then needs to invest these funds to maximize the return to the members of the fund. The investments made generate returns to the Fund, out of which administrative costs are deducted. What is left is then credited to the member accounts. When workers reach retirement age, they can withdraw these savings for their retirement.

How do we measure the fund’s performance?? The fund is asset rich with minimal liabilities. It receives contributions from the employer and employee contributions each month of approximately VT200m. The funds are pooled in to an account called the members fund and these funds are invested on behalf of the members. The investments of the fund earn a return out of which administrative costs are deducted. Any Profits generated from the investments are transferred to the General Reserve in the Fund. Periodically, the Administrators of the fund will transfer to the members account some interest to represent the returns it has made on its investment. In 2023, this was 2%, but the amount will vary depending upon the performance of the fund’s investments.

Unfortunately, in the past, the returns made from investments had little correlation to the interest paid to the members. As a mutual fund there is no separation between the funds corporate management from its members funds. However, even with its strong cashflows, total assets fell in 2017 and 2020. These dips in total assets were associated with periods where the VNPF management paid a return on members funds that was well in excess of the actual return on funds earned indicating that significant losses were incurred on investments in those years.

The investment management of the fund needs to ensure that the returns on its investments match the payments of interest to the member’s fund. If the returns are less than the interest credited, the General Reserve of the Fund will be depleted. This occurred in the years 2007-2012 which contributed to a deficit of VT646.7m by 2012.

The Fund also incurs administrative costs in managing the fund and its investing activities. To ensure that the General Reserve is not depleted, it must ensure that the administrative expenses as a % of the fund balance must not be higher than the returns credited to the member’s accounts. Lower rates of crediting interest to members accounts from 2013 coupled with improved returns on its investment was able to slowly replenish the General reserve which has since returned to surplus.

What has the Fund invested in and how are these investments performing.

Up the end of 2020 the fund had slowly recovered the balances in General Reserve through better investments and cutting back on payments to the members funds. However, the following figure shows that VNPF Fund members would have received far superior returns by simply investing their retirement funds in a mix of Government debt securities which would have incurred much lower administrative costs.

In the 2023 Balance Sheet, the investments made by the Fund were as follows.

vatu

Term Deposits 440m

Government Securities 4,762m

Loans and Advances 2,619m

Investments in controlled entities 4,913m

Investments in Joint ventures 3,549m

Other Equity Investments 851m

Investment Properties 3,922m

TOTAL 21,056m vatu

Since it was established, The Fund has faced a lot of challenges under the various leaderships. Despite the improved returns on its investments in recent years there is still much room for improvement towards the growth of this important institution and the socioeconomic development of the people of Vanuatu as a whole.

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