Public Briefing to Members on the Occasion of the Announcement of 2014 Members Interest Rate

Honorable Rick Hou, Minister of Finance and Treasury, All contributing members of our Fund; and Members of Local Media:

On behalf of our members, the Board of Trustees, management and staff of the Solomon Islands National Provident Fund, I would like to thank the Minister of Finance and Treasury, Hon. Rick Hou for taking time out of his very busy schedule to come here and formally announce your 2014 interest rate. This interest rate will be applied and added to your savings kept by your Board for your retirement.

Thank you very much Honorable Minister of Finance and Treasury.  It is an honor to have you here with us.

Also, before I go on and talk about the progress of your Fund in the last financial year, I wish to register my most sincere thanks, on behalf of the SINPF Board, to Hon Rick Hou, Minister of Finance and Treasury, The Prime Minister, and this Government, for one very important factor:

For two and half years since taking on the reign as Board Chairman of SINPF, it gives me pride and joy, that this Minister, and this Government, has allowed our Board to manage as we see fit, within the bounds of the SINPF Act, without any interference whatsoever. For this, I as Chairman of the Board, I am truly humbled. For that reason too, we, as a Board, have been able to invest your funds where we see fit, without the worry that we will be directed otherwise.

Thank you again Hon Rick Hou.

Now that the 2014 crediting rate of 15% is publicly announced, a positive rate above inflation by 10.0% at the end of June, 2014 (inflation around 5%), I would like to briefly present to you information on the level of your contributions, performance of your investment and it’s growth, challenges, and prospects for next year.      

Members Contribution Balances

To all our 116,873 members with credit contribution balances, I am pleased to advise that the total estimated balance of all your contributions recorded in your individual accounts is worth $1.8 billion, before today’s crediting. This is up from $1.7 billion in June 2013, an increase of $109 million fueled by your new contributions and the impact of the previous 2013 year crediting rate of 20% of more than $246 million that was added to your contributions at the end of 30th June 2013. 

Today’s 15% crediting rate will be applied to your contribution balances, recorded 12 months ago on 30 June 2013 of $1.7 billion. A crediting amount of $232 million within the next few days will be added to your current accounts of $1.8 billion, to a new high of more than $2 billion, to $2.032 billion. As raised below, this is a challenge that my Board and future boards will have, as the value of member contributions grow, NPF must continue to invest to ensure adequate positive returns continue to grow each year to cover for operating costs and distribution to members.

It is pleasing to note that total interest earned on your contributions of $232 million is higher than total net contributions received during the year of $113 million, after deducting for member withdrawals of $114 million. This $114 million is now circulating in the economy by those withdrawing members.

The strong growth will continue to be fueled by your contributions paid in on your behalf by your employers to your accounts and the effect of compounding interest credited annually to your account over your membership term with the Fund. 

Excellent Performance and Growth in the Investments Portfolio over the two years

Your Fund’s investment performance has another good year with an expected return of around $140 million with upsides that this can be more, once our books are audited and signed off after 30 June 2014.   While last year’s income performance was $840 million, that performance was driven by the 1st time ever revaluation of our two cash cow equity investments, SPOL and Telekom.

Your Fund’s Investments portfolio has grown and reached $2.5 billion at the end of May 2014, and there are still possible upsides to take place by the end of June, 2014. In the last two years, investments have grown by $1.07 billion primarily driven by the growth in value of our two key equity investments, South Pacific Oil and Solomon Telekom.

The real challenge for NPF and the Board is how to continue investing your money responsibly, giving you a healthy rate of return that is above inflation over your membership term. At the same time continue to protect these investments from external influences that are usually not the making of NPF.

This challenge is further complicated by the narrow economic base of our country, and the lack of good investment opportunities to invest in.  

Asset Allocation, Risk Diversification and Challenges

SINPF is set up by the SINPF Act and its reporting standards are clearly specified in the NPF Act. However, for reporting purposes, we adopt international accounting and auditing standards. We are also audited to these standards by the Auditor General and his appointed agent. To comply with these standards, we have to revalue substantially ALL our investments every year. This is an added cost to your Fund as these valuations must be paid for. Further, where revaluations have substantially increased values in certain investments, all of a sudden, we become overly exposed to one or two of our investment categories, for example, SPOL and Telekom, when in fact our real outlay of cash on initial investment in these entities did not even come close to breaching the concentration risk guidelines under the Financial Institutions Act, on risk diversification.

At this point, it is important for me to say that this Board has missed out on very good investment opportunities offered to it in the past because of this artificial exposure. Further, we have been requested to divest some of our most profitable assets because of that exposure.

On behalf of my Board, I kindly ask Ministry of Finance and the Central Bank, to be mindful on how they calculate these risks when it comes to investments and divestments of the Fund. Otherwise, as we can see today, SINPF is far too cashed up and will one day be in a position where it will not be able to return adequate returns to its members, especially if the bank interests continue to be where they are because of too much liquidity. Please help us make our job easier.   

On that note, I am sad to say, currently our investments are not as well diversified as we would like them to be because of the challenges previously indicated. However, because of these higher risk investments, the Fund enjoys very healthy returns from these key investments. We are doing everything we can to mitigate those risks.

Currently your Fund has a very high level of cash holdings both in local and offshore banks of around $730 million, returning very little to members, as deposit rates in these banks at present are below 1% per annum, due to high liquidity in the domestic financial market and expansionary policies in offshore markets. 

Government bonds and securities are also yielding very low returns (around 2.0% per annum).  The risk to members are that your funds are earning returns below inflation, undermining the value of your contributions but more importantly less than what we are by law required to credit your contributions annually at 2.5%. i.e. making money at less than 1% and paying you 2.5%. This is clearly not sustainable.

After revaluation of our key investments in Telekom and SPO, our exposure to equity investments has substantially increased, meaning our exposure to high risk investment has dramatically increased. This is a concern to the Board, and we are actively trying to find ways to mitigate these risks by increasing investments in other investment asset classes, including overseas.

We have nearly 90% of our investments here in Solomon Islands and 10% abroad. While this is a great thing that we are helping to develop our country, our first responsibility is to protect our members’ investment. We need support from the Central Bank to approve more offshore investment to diversify and reduce this risk of domestic exposure.

The Board continues to proactively seek out investments in our core sectors i.e. telecommunications, fishing, tourism, infrastructure, and fuel distribution as a conscious strategy to diversify your risk. We are also keen to look at ways of working together with key statutory assets of the nation, where warranted. Our recent joint loan to SIEA with Westpac Bank where we will fund $70 million of SIEA’s need for new generators, is a good example of how your board is actively seeking participation in nation building while making returns to our members. We thank the Board and management of SIEA for choosing us as part financier of their needs.

New investments made in the year include:

1. the completion of our Hibiscus Apartments, now fully tenanted, which your Board believes is the pride of Honiara city;
2. construction of the Food Court currently in progress (nearing completion);
3. increase in our Kina investments; 
4. joint lending to SIEA with WBC to assist SIEA acquire their generators;  
5. completion of twelve residential houses in Tulagi, to be rented to Sasape International Shipyard Limited; and
6. opening of new Australian dollar fixed term deposits with ANZ Brisbane Branch, in Australia

Future Possible Investments/Risk mitigators:

1. Investment Bank – The Board is seriously evaluating the possibility of opening an investment bank, partly in answer to our member’s needs to borrow money for various reasons, whether it is for their new home, investment, lifestyle improvement, etc. We have been carrying out feasibility studies on this for nearly two years and are of the firm belief that there is a market need for such an investment.
2. Mini-Capital Market (stock market) – Again, we have carried out studies on this proposal and firmly believe that now is the time to start such a market. In fact this is a very important risk strategy for NPF whereby we can offer parts of our successful companies on this market, to Solomon Islanders with money. NPF Board, through management, have been talking with the Central Bank and the Ministry of Finance, on this proposal, as the establishment of such institution is clearly NOT an NPF mandate, but rather the Central Bank and Ministry of Finance. However, we are very keen to facilitate its inception and provide some of our more successful investments as prime candidates for the initial startup.
3. The Board continues to explore other opportunities including regional cooperation with other regional Provident Funds on joint projects regionally.

Investment Objective and Criteria

Your Interest, First

Investments decisions made on these new undertakings are guided by your Fund’s risk return strategies and guidelines that foremost must enable the Board to achieve its investment objective, that are:

1. to deliver positive returns to you our members; and
2. over your membership term with the Fund, protect the value of your contributions against inflation.  

Typically your membership term with the Fund ranges over a period of between 25 to 30 years.   Your Board’s investment horizon is therefore long term.  

General Reserves / Member Stabilization Fund

In the past, it has been NPF’s policy to distribute all its current net operating income to members every year. However, because of the new accounting reporting standards (IFRS) requirement, a significant portion of what is carried in the Profit and Loss of the Fund and therefore the Balance Sheet, is a significant portion of UNREALIZED GAINS or LOSSES.

NPF is in real danger of distributing today, future values of assets, booked to the Profit and Loss statement that might not be realized at a time of future sale. For this reason, my Board has set aside a reserve for stabilizing return to members and also meets fluctuating exposure to unrealized gains/losses. Because the NPF Act does not allow us to create other reserves, these funds currently sit within the General Reserves.

Today, we carry more than $500,000,000 (half a billion) in this reserve so NPF is in a very healthy state of affairs for a few more years to come.      However, I ask that future Boards take responsible steps to ensure this reserve is not eroded away unnecessarily, to support operational requirements and member crediting.  It was just only 8 years ago in 2006 that this reserve was in negative $1.8 million.

New SINPF Act

One of the most important challenges, in the new financial year is getting the new legislation reform of your Fund by approved by the National Parliament.   Members, Employers, Unions, the Chamber of Commerce and Industry, the Solomon Islands Government, and the regulator the Central Bank of Solomon Islands have contributed to the legislation reform of your Fund.   After the public consultations, the bill is now being drafted and should be ready for Parliament next year. 

Other Challenges

1. The Fund is the biggest financial institution in our financial system and our economy therefore it must be well managed and be supervised properly by the regulator.   
2. There are competing views of what the Fund should and can do and these have been taken on board and considered when the SINPF Legislation Reform team went out seeking the views of members and stakeholders.  

Outlook for next financial year

Whilst the outlook for the global economy performance are strong driven by the resurging recovery of the US economy, our national economic prospects for growth is weak following the April 2014 flash floods and the uncertainty surrounding the closure and the re-opening of our only gold mine at Gold Ridge.   

Despite the challenges of our economic slowdown, further income streams for the Fund should be forthcoming from our current underperforming assets of our portfolio and new investments in infrastructure and property development.   

Acknowledgement

To close, I would like to sincerely thank the support and assistance of the following:

• The Minister and the Permanent Secretary of Finance, Hon Rick Hou and Mr. Shadrach Fanega and their Staff at the Economic Reform Unit
• The Governor and Deputy Governor and the management team at the Central Bank of Solomon Islands
• The Auditor General and his officers at the Office of the Auditor General (OAG)
• External Contractors of the OAG, Deloittes Ltd and KPMG Ltd
• Board, Executive teams and staff of our various subsidiaries
• Our External Consultants
• All our current complying employers for the support and the timely payment of your employee contributions  
• All our members with credit contribution balances
• Colleague Trustees on the SINPF Board, and 
• Senior Management and Staff of the Fund

All I can say is, it is a pride and joy to work with the NPF team and the various groups that have made NPF what it is today. Your funds are in good hands. Thank you and God bless Solomon Islands

Baoro Laxton Koraua,
Chairman