Seychelles has managed to position itself as one of the top tourism destinations worldwide while maintaining a good level of welfare and being a model of public health. In your opinion, what competitive and comparative advantages set this country apart?
I feel that the key has been the people. With the history of a welfare system, the focus has always been on human development. In fact, I just read yesterday that Seychelles tops the Human Development Index in Africa. As the saying goes, the proof is in the pudding, and this achievement is a result of the consistent emphasis on the well-being of the people. Having a small population is also an advantage, because there is less pressure on resources. However, that also means we cannot benefit from economies of scale – we still need hospitals, we still need schools, we still need specialized medical equipment – and the use of this equipment is a lot less than necessary for a return on investment.
Irrespective, the government has always had the ethos of looking after the people, ensuring that they progress with the country.
The Seychelles Pension Fund is a cost sharing retirement system through contributions from employers, employees including the self-employed and investments. How has the system changed over time?
It is not really a cost- sharing retirement system. In the world of pensions, there are two types of pension systems. Ours is what is called a Pay-as-you-go system, meaning our generation of today pays for our parents, and our children will pay for ours-a solidarity between generations. The other system is a Fully- funded system, where the pension fund caters to the full payment of all pensions payable for its members. Then we have the two types of pension payments. There is the defined benefit, and the defined contribution. The defined contribution is when, what is being contributed is what you get as a pension at a later stage with added interest. The defined benefit, on the other hand, is what we have here in Seychelles, where the pension payable to a pensioner is predefined and calculated by a formula, regardless of what one has contributed. This formula includes four different aspects multiplied together: one’s average wage for the last seven years (which goes up by one year each year), the number of years that one has worked, the national wage growth in the country (so that if there is a wage increase, the benefit is passed on), and the accrual rate which is a certain amount accrued to your pension, as a percentage of your salary.
As a result, when you look at someone’s contribution towards SPF and what one receives as a pension, it is not linked at all, as generally a pensioner would have received a lot more than what has been contributed. This is because we are a very young and immature pension fund being only eleven years old, with the replacement rate being 53% today, meaning the pensioner will get at least 53% of their last earned salary. However, the new formula introduced in 2015 to calculate the pension, has strengthened the link between contributions and benefits to improve fairness and as an incentive to participate. Yes, we are a country that has the lowest contribution in the world at 4% of salaries, where the employer contributes 2% and employees 2%, but because we have been able to reap the benefit of the demographics in the country so far, (a lot more of young people contributing and a lot less people receiving pension), we were able to amass a lot of surplus funds which we then invested wisely. Today our income is around 35% from investments and we collect 65% percent from contributions.
However, what is frightening for us is the rise in ageing population as per the forecasted international demographic developments. Seychelles is no exception, and it means that in 20 to 30 years’ time, we will have two problems: shrinking of the working age population-having less young people contributing, so reduced income from contributions and more elderly living longer, which means that there will be a lot more pensioners to pay. The added problem is that the pensioners will live longer than today. Statistics wise, in 2015 at the age of 65 our pensioners could, on average, expect to live another 8 years, but in 2040 it is estimated they will live another 18 years. As the years go by, with an aging population and life expectancy going up, we will get less contributions and will have to increase the contribution rate and ensure even higher investment returns or investment income that we get.
We are preparing ourselves for such an eventuality, and although we are doing extremely well with our investment income at the moment, it won’t be enough in 20 to 30 years’ time. We will need to increase contributions as recommended by our Actuary to 10.5% by the year 2040, with 2% increase by 2019, 1% increase thereafter every 5 years and we have communicated that to the government. They have given their approval to increase the contributions steadily every five years, starting this year as recommended and we are now waiting for the legislation to go through.
In Seychelles, the state provides free primary and universal access to healthcare and you have a life expectancy at birth of 75 years. How does the Pension Fund, along with the Social Security fund, contribute to these achievements?
I think we look after our senior citizens really well and we have a comprehensive social protection system in place. We have not only the contributory pension with SPF but there is also a universal pension of SCR 5050 that Government pays out through the Social Security Fund to our elderly once they attain the age of 63 years, irrespective of whether they have worked or not. In fact, we have three pillars of pension in the country. Firstly, there is the universal pension, as explained. Secondly, there is the SPF mandatory contributory pension with us that guarantees the members a pension for life, the criteria being that they have contributed at least 10 years before retirement, or 20 years’ aggregate. The third pillar, is what we call the voluntary contribution also with SPF, which is like additional savings being made with SPF towards retirement. The key difference between the two is that the voluntary contribution can be paid out in a lump sum or as an annuity at the time of retirement, whereas the mandatory contribution is paid out monthly for life. SPF also does annual indexation of the monthly pension to inflation, to ensure that the cost of living aspect is considered and taken into account in the pensions and benefits being provided. Thus, as you mentioned, with free health care, a minimum pension for life from Government, an indexed monthly contributory pension from SPF assured for life and additional savings paid out as a lump sum from voluntary contributions from SPF, we help our senior citizens to live well after retirement. As our motto goes ‘viv ere’ meaning living happily ever after!
In order to sustain the funds, SPF has to ensure the right level of contribution to the Funds. How do you work with the government and companies so as to effectively receive the expected contributions?
There is a common misconception that SPF is part of the government – but we are independent. The government is only a facilitator, particularly in terms of providing the required laws. For example, whenever there is a need for an increase in pension contribution, it has to be approved by the Government based on the recommendations from our Board of Trustees, following which it needs to go to the National Assembly, for approval before it becomes part of our law.
How do you communicate these developments to the public?
Today the Social Media plays a very important role and we use it quit extensively these days. We also go through the traditional media press release where we inform our members as to what we are doing. For example we published our audited financial statements for the year 2016 in the local newspapers. Once in a while we have an event. For example in January, we had a symposium where we went public with the activities of SPF and the future needs of SPF where we presented, debated and encouraged audience participation, on various topics but mainly on retirement age. We had very positive feedback from the symposium – it was the first time we ever did something like that, inviting the public and updating them on our progress. When we mentioned that we are the country in the world with the lowest contribution rates and presented the serious effects of demographic developments using the “crumbling pyramid”, which shows the population pyramid becoming increasingly square by 2040 with a big elderly population at the top, the attendees including the Vice-President, the Leader of Government Business, the Leader of Opposition, and several Members of the National Assembly were reassured on the need to review the rate of contributions. It was reassuring to hear them agree that we should increase contributions without delay. We hope to do more of such interactive sessions with our members, at least one annually like an annual general meeting. We have also embarked on information sessions in various districts to help our members understand better SPF.
It always comes down to effective communication and openly sharing information with the public. We have around 41000 active members from a labor force of 46000, which means we are very well covered at the moment. Visiting the districts and communicating with our members will help make this even better.
Due to the nature of the SPF, your mandate is also to encourage savings, and the need to make voluntary contributions to the Fund by members and the self-employed to enhance their retirement benefits. What are the channels in which you communicate such benefits and tackle such issues?
I think this is a problem faced by Pension Funds worldwide: how to capture the informal sector. We launched a few campaigns last year to get the word out, and we do sessions with various associations of the self-employed. For example, the taxi association, the farmers’ association, and the fisherman’s association. We advertise where we can with strong messages encouraging people to realize they will be left out if they do not contribute. We also write letters and go on site visits whenever new businesses are being set up.
We want people to understand what they stand to gain, and know that we work for their benefit. Our target is to have at least 75% of the self-employed sector contributing. A lot of people do not know that we pay interest for the prevailing year at 3.5 % for both voluntary and mandatory contributions. This is very attractive as there are banks here that are not giving any interest on deposits. It is a forced savings towards retirement and people don’t quite understand it now but are so thankful to SPF when they retire and get a lump sum payment. We also peg the pension fund to the rate of inflation in the country. So, if there is an increase in inflation your pension automatically increases.
In line with the government’s strategy of diversifying the economy, you are also looking at the diversification of your investments. Where are you investing at the moment and are you planning to diversify those investments?
Absolutely! We believe whole-heartedly in having a diversified portfolio for our investments. We have a very strong role in local real estate, and I raise this point with the likes of the IMF and World Bank when they caution us. We currently have 46 % of our investments in real estate, but it used to be much higher. The sad truth is that we are a very small country and land is scarce, so there will be a time in the future where we will not have enough land – so investing in land now can only bring a whole lot of advantages. Land in the heart of the city, Victoria, is already so scarce, and most of our investments in real estate are in commercial buildings in the heart of the city and they do very well – they are all 100% rented at all times. We also have commercial buildings on inner islands like Praslin and La Digue. We have recently ventured into residential apartments also. Overall, I strongly believe they are all important investments, and very good investments, as we get an overall rate of return of 9% annually.
Aside from that we have deposits, and investments in treasury bills and bonds. The danger in that is having no control on the interest rates. We also have some investments abroad , which are more for currency hedging, as well as some investments in exchange-traded funds where we manage them on our own.
We have also diversified our investments in equity, which brings us the highest return. We own 36% of the largest insurance company, Sacos and we own 26% of the Seychelles breweries, as well as 30% of Al Salam Bank of Seychelles and some shares in Seychelles Commercial Bank.
What is your goal in term of contributions?
The goal is to prepare ourselves for what I call the “tsunami of demographics”. If we can organize ourselves to bear the effects of that, we will be okay. We are targeting around 50% returns from investments in the long term, which seems achievable for us, and this together with the increased contribution rates should smoothly tidy us over for the “rainy days”.
What are the channels through which you communicate such benefits and encourage the mass population to make savings?
From my experience, this is a cultural thing. For example in many parts of South East Asia, people work hard, save money and send home. This is not part of our Seychellois way of life – nobody saves for a rainy day, because nobody expects a rainy day. I think the services offered to us, such as free primary, secondary and tertiary education, free healthcare, and even subsidized housing, encourage this outlook. But we can see some difference in the attitude of our younger generation and this has to intensify, where we should all try and save for ourselves and not be totally dependent.
I think word of mouth is an effective marketing strategy here in Seychelles given the size, and our way of life. Right now a lot of people are talking about SPF and the good pensions and benefits we are paying our pensioners, especially since the launch of our new formula in 2015. People have taken a renewed interest in their Pension Fund today. Some people get more than 80% of their last earned salary on retirement, and some even get more than their last salary when they combine the SPF pension and the Government pension. Whenever we have that initial interest or curiosity from the people, it is up to us to cultivate it and bring them on board. We have used TV spots, we featured a regular newspaper “Tips on Pension” Column in the widely read local newspaper and we actively go on site visits every month to companies or districts to talk about what we offer.
Mrs Nair, you are currently SPF’s Chief Executive Officer, the Chairperson of the Development Bank of Seychelles, Director on the Board of Seybrew and a Board Director of SACOS. The National Disaster Relief Fund is also under your chairmanship, and you do volunteering work at the SOROPTIMIST International club of Victoria, an international charity organization for professional women. What would your message be to women striving for top positions and trying to strike a balance between life and work?
I think it’s important to define the work and life balance for yourself, as it depends entirely on what your priorities and goals are. Following this, work hard, have fun and give it your best shot! As a woman it can be especially challenging because we are expected to look after the home, the husband, and the kids, but the key is to surround yourself with the right people – both at work and at home. The support of your family and your colleagues at work is invaluable in striking the right balance, where you don’t sacrifice your family for your career or vice versa. You need a good team around you always and a very positive attitude. Once you have that, the sky is the limit!